Thursday October 26, 2:05 pm Eastern Time
Leap Wireless seeks Middle America cellular subscribers
By Timna Tanners
LOS ANGELES, Oct 26 (Reuters) - Call them the Southwest Airlines of the wireless world, or the cost-conscious providers of cellular
phone service.
While most mobile phone companies target wealthy globe-trotters logging thousands of minutes of overseas calls, upstart Leap Wireless
International Inc. (NasdaqNM:LWIN - news) wants Middle Americans to help boost its bottom line.
Leap launched Cricket, its flat-rate, all-you-can-talk, local wireless service, in a third market, Knoxville, Tenn., this week as part of a strategy to tap the two-thirds of
Americans who do not currently have mobile phone service.
``Typically we found 85 percent of people wanted wireless, but ... today only 35 percent of people have it,'' Leap Chairman and Chief Executive Harvey White said in an
interview.
``So we went back and talked to people and found that those who didn't have wireless were put off by the confusion and complexity of the bill, and to some degree the
cost.''
White likens the company to Southwest, which has eked out profits that surpass its larger competitors by finding a no-frills niche in the high-cost airline industry.
San Diego-based Leap was spun off two years ago from mobile phone technology company Qualcomm Inc. (NasdaqNM:QCOM - news), which White co-founded.
Qualcomm's patented CDMA technology is fast becoming a standard for new generation wireless communication.
At a fixed $30 a month, Cricket allows unlimited calls in local areas, with additional charges for long distance. The price competes with rates for fixed phones, and indeed
Leap says 7 percent of customers have abandoned their land lines.
KNOXVILLE AND BEYOND
On Wednesday, Leap took Cricket to Knoxville to expand its reach in the state from Chattanooga and Nashville, where it has signed up 5 percent of the market -- about
62,500 customers.
It aims for a million customers by the end of next year in a total of 35 markets, adding 25 more markets in 2001, primarily in cities with populations from 400,000 to three
million in the South, Southwest and Midwest.
That growth pace has required Leap to bid for and purchase wireless operating licenses across the country, and commit to buying $1.6 billion in infrastructure and related
services.
It has also come at a sacrifice to overall profitability, but White is not daunted.
``It's hard to predict when the total company might reach profitability because we keep adding markets, so if we are successful, it will delay total profitability,'' he said.
The company has so far reached break-even in markets after 12 to 15 months in terms of EBITDA -- earnings before interest, taxes, depreciation and amortization. EBITDA,
also called cash from operations, is a common measure of performance in capital-intensive business where start-up costs are high.
In its third-quarter earnings report this week, Leap had a net loss of $54.1 million, or $2.10 a share, yet operating revenues rose 34 percent to $36.1 million.
``We're very bullish about their business plan. I think they've carved out a highly successful marketing strategy in target markets,'' ABN Amro analyst in New York Kevin Roe
said.
BEATING THE BIG GUYS
So how does a fledgling cellular provider undercut the larger carrier's prices?
Leap designs its networks to cater to its need for high volume at minimum cost in a local region.
``Usually larger companies are interested in high ARPU (average revenue per user), while we're driven by penetration and cost,'' White said.
Leap sees average revenue of $35 per customer. In comparison, AT&T Wireless reported ARPU of $71.50 in its second quarter.
Leap's network is also specially designed for its calling plans and customer base.
``The beauty of their plan is they designed the network to grow up to service the customer for unlimited calling. Competitors can come close, but the disadvantage is that
their network is not designed for this kind of usage,'' Roe said.
Many Leap customers are using Cricket as their primary phone, White said. The service's target audience is new households, mobile young people and families looking for a
second phone line. |
