Leap Clears Its Hurdles, One By One
wirelessweek.com
By Margo McCall
January 14, 2002
Wireless Week
Many industry watchers didn't know quite what to make of Leap Wireless International Inc. when it sprang onto the scene with its Cricket service in early 1999. At a time when other wireless carriers were going after so-called high-value customers and relentlessly working to boost average revenue per user, Leap's offering of flat-rate local service made little sense.
How could a carrier make money by offering a no-frills service without roaming? Wouldn't flat rates result in the network being inundated by an explosion of usage? And how could Leap succeed by going after the mass market? What kind of revenue would that generate?
Frank Marsala, a wireless analyst with Robertson Stephens, admits to being initially baffled by Leap's business proposition. "They described a business not like a business I understood. They described a wireless world I didn't recognize," he recalls.
Leap management fought off the naysayers as they prepared for the company's initial launches, which ended up attracting far more subscribers than expected. They battled questions about Leap's ability to build out a network and whether the mass-consumer approach would work in subsequent markets.
Now that the San Diego-based company is entering its fourth year of service and nearing completion of the launch of its first 40 markets, the flurry of questions finally is subsiding. It helps that the fast-growing company signed up more than 250,000 new customers in the third quarter of 2001–up 2,000 percent from the 13,500 added in the third quarter of 2000.
When other companies lowered their financial guidance, Leap actually upped its 2001 net addition expectation from 1 million to 1.1 million. The carrier hit the 1-million-customer mark in mid-December. And last week, as many small carriers were lamenting slower subscriber growth, Leap announced that it exceeded its 2001 guidance with 1,119,000 customers in the fourth quarter. Its fourth-quarter net additions of 394,000 represented another all-time high for the company.
Today, financial analysts are increasingly taking an interest in the company, which recently was designated the "Most Innovative Wireless Service" by Andrew Seybold's Outlook 4Mobility.
Leap isn't the only innovator to have faced such doubts. Leap CEO Harvey White notes that few initially believed that Henry Ford could mass-produce cars, or that Southwest Airlines founder Herb Kelleher could start a low-cost, no-frills airline, or that Qualcomm could become a contender with its CDMA technology.
"We always had faith in the business plan, and our faith has been totally justified," says White, a co-founder of Qualcomm who directed Leap's spinoff from that company in late 1998. "With anybody who basically breaks out and tries something new, there are always skeptics."
White says the company's faith in its business plan stemmed partly from the care with which it was drawn up. The founders quickly realized one important thing, however: Their idea wouldn't work unless business costs were cut to the bone. "No one can do what we're doing unless they re-engineer the cost structure," White says.
As other carriers try to mimic the Cricket offering with so-called Leapalikes, that simple fact will help keep them at bay. "People have been out there trying to introduce something similar. But ours is the total business," says Leap COO Sue Swenson, former CEO of Cellular One whose two decades of wireless experience include stints at Pacific Bell and PacTel Cellular.
Many of the key cost savings stem from Cricket's simplicity. Local calling, which requires fewer cell sites, lowers infrastructure costs. Handset choices are kept to a minimum, allowing Leap to save money by buying in bulk. Customer service costs are minimized because new subscribers can walk into a retail outlet, pick up a prepackaged phone and simply call a toll-free number to activate the phone. And unlike other carriers, Leap doesn't pay commissions or residuals to indirect distributors.
Customers also pay for service in advance, eliminating the possibility of bad debt and the necessity of employing an accounts receivable staff. If customers don't pay, their service is temporarily suspended. That approach may result in higher churn rates, but Swenson says it also ensures that the "Cricket bill gets pushed to the top of the pile."
Further cost savings are realized by not itemizing bills, a practice aimed at cutting down on customer service calls. And since Leap pays for its outsourced customer service on a volume basis, the fewer the calls, the better. Fielding a customer inquiry, Swenson says, is more complicated than it seems once research and processing time are factored in. "Instead of a five-minute call, it turns out to be a one-and-a-half-hour transaction," she says.
Leap also has adopted a cost-conscious "cookie-cutter" approach to launching markets. This market-by-market approach allows for easier upgrades to next-generation services. For example, rather than upgrading its entire network, Leap recently selectively upgraded networks in the company's two largest markets, Denver and Phoenix, to increase voice capacity. And because the carrier's advertising campaign can be used anywhere in the country, the costs can be spread out over a large scale.
The company's trademark green couch, intended to depict "comfortable wireless," has become something of an icon. When the Boise, Idaho, market was launched, one of the leaf-green sofas actually was attached to a raft and floated down a river. Customers are so enamored with the sofas that Leap has started receiving requests from people wanting to buy them. The piece of furniture has the added bonus of being a lot cheaper to hire than a celebrity spokesperson.
Prudence is a word that comes up often in conversations with Leap executives: prudence in launching markets, prudence in raising money, prudence in purchasing spectrum. The market-by-market approach allows the company to go after good spectrum deals, rather than focusing on the lucrative, but more expensive, markets. The strategy has paid off. In last January's spectrum re-auction, Leap paid $14.73 per POP for its licenses, the lowest average price among the top 10 most active bidders.
Luckily, Leap managers were prudent about one other thing: They didn't base their business plan on the expectation of a booming economy, thus avoiding the mistake of many high-tech enterprises. While some smaller carriers have reported a slight slowing of new customers during the slump, at Leap the slow economy has delivered an unexpected boost. That stems from the fact that the company is targeting the wireline replacement market. For many customers, Leap provides their only phone.
In moving into segments not pursued by other carriers, Leap has attracted young people, who may not have the established credit required to sign contracts for other wireless service, and parents interested in purchasing low-cost wireless service for their kids. The unlimited local service costs about $35 per month, with customers able to add features such as voice mail, call waiting and caller ID for extra monthly fees.
Because 60 percent to 70 percent of Cricket customers are new to wireless, there's usually an initial spike in call usage as they first experience the thrill of making a call from the park or a grocery store. That typically subsides, however, and rather than exploding, as some expected, average minutes of use remain a high but stable 1,100 per customer. Furthermore, Swenson says, "There's a natural limitation to usage. There are only so many hours in the day."
Last year, in the midst of its busiest year of network rollouts, Leap saw its third-quarter net loss grow to $160.7 million, up from $128.5 million in the previous quarter. But its ARPU rose to $37 from $36 in the previous quarter and its churn rate declined, both encouraging signs.
The carrier has cleared many hurdles in the past three years, most recently when it renegotiated its vendor-financing agreements with equipment suppliers Ericsson, Lucent and Nortel. As 2002 unfolds, it will have to clear another big hurdle as executives consider how to obtain the financing needed for continued growth.
White says the company is looking for a combination of debt and equity funding. "We have the financing to do 40 markets, but to double the business, we will need more financing. That's a challenge in this financial marketplace."
For his part, analyst Marsala is optimistic. "If you're executing like crazy, the funding will take care of itself," he says. |
