LEAP
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Harvey White hardly looks the part of a revolutionary. He is reserved and almost courtly in his manner while talking about his new way of selling an amazingly affordable type of wireless telephone service. But as CEO of a cutting-edge telecommunications company, he gets taken seriously. "We're out to change the way people think about communication," says White of his Leap Wireless International's mission. He likens the approach to drive down the costs to what Southwest Airlines did with air travel. But instead of luring Greyhound passengers into the air, as Southwest did, White aims to attract earthbound phone users into inexpensively, and permanently, joining the wireless world.
For White, the concept of transitioning people from thinking in terms of "home phone" and "mobile phone" to terms of just "your phone" is both simple and inevitable.
"As wireless service quality becomes equal to wire line, which it is today in many instances, and people feel there is good security and the cost structure is competitive, people will insist and expect their telephone service to be mobile," he says. "In the coming years people won't be able to believe that telephones were once hooked to the wall with a wire."
To impress that concept on U.S. consumers, Cricket Communications, a domestic Leap subsidiary, has launched a service described by industry analysts as exciting and unique. Called "comfortable wireless," it debuted in Chattanooga, Tenn., in March. For a flat rate of $29.95 a month, Cricket customers get what is best described in today's terms as "home phone" service. Yet with Cricket, they can make and receive unlimited local calls, from their home or anywhere within the coverage area. "What we're offering is basic telephony in a mobile wireless form," says White.
Making this happen is what is known as Wireless Local Loop systems. Long-distance calls are not included in the local loop. A prepaid calling card is required for that service. Roaming, or using the phone outside the local service area, is not an option.
The Cricket concept -- Leap recently bought from the federal government the rights to take it to 36 mid-sized U.S. cities, such as Salt Lake and Anchorage -- has helped Leap land key executives.
"I heard from Leap Wireless and they said, 'We're thinking of taking wireless to the next step and going after the mass audience, the soccer moms, the teenagers, the college students, to really penetrate the wireless market,'" says Paul Argay, senior vice president for marketing and sales at Leap's Cricket Communications. "I was excited to hear about this mass audience thrust, that now there was a company that was really dedicated to making it happen."
Argay is a pioneer in wireless consumer marketing. His credentials include serving as vice president of marketing at American Personal Communications, a Maryland-based wireless start-up that in 1995 offered the nation's first digital personal communications services (PCS). APC was acquired by Sprint PCS in 1998. In the more traditional marketing arena, Argay has worked with consumer giants Procter & Gamble, Nestlé and Haagen-Dazs.
For most U.S. consumers, a wireless telephone is a secondary phone, a mobile device that allows them to make phone calls when not at the office or home where a landline telephone handles the chore. But the Wireless Local Loop concept has analysts busy making calculations and predictions about when local wireless could start to replace traditional landline telephone service.
The bottom line is how infrequently most people use their wireless telephones for roaming. The majority of the calls are within the service area: to work, home, friends, family. And although most service plans these days include a sizable chunk of free minutes, eventually the tolling begins. Of course if wireless users weren't worried about eventually being billed for extra minutes, the underlying system could become swamped. This is where the Cricket concept becomes dependent on the digital horsepower of Code Division Multiple Access, or CDMA, technology. "The foundation of (CDMA) capacity is what gives them the ability to offer low cost local service," says Crispin Vicars, an analyst with the Yankee Group, a technology research firm based in Boston. "Leap's service is based on Qualcomm's CDMA technology, and competitors may not be able to match them in capacity."
Indeed, CDMA's ability to maximize the use of radio frequency spectrum is touted as providing 10 to 20 times the capacity of analog wireless technologies and more than three times the capacity of other digital technologies, such as GSM (Global System for Mobile).
"You need to provide the same quality service at a competitive price, and that is becoming increasingly possible," says Dan Pegg, senior vice president of public affairs at Leap. "In the New York City area, you will find people who have given up their regular wired phone for wireless. The surcharges they have to pay, because they have such a small home boundary, make it less expensive to go wireless."
A Yankee Group study forecasts that customers will start to substitute wireless for regular phones when the cost of wireless calls is no more than three times that of regular phones. Using a wireless phone in the United States is five to six times more expensive than using a regular phone. Not so with Leap's Cricket, where the $29.95 comes close to the cost of a monthly home phone bill.
The Qualcomm Ties
Headquartered in Sorrento Valley, Leap Wireless International directs wireless communications operations in locations as diverse as Chattanooga and St. Petersburg, Russia. While many people may not know Leap, or what it does, a lot are familiar with Leap's parent: Qualcomm. Leap was spun off last year by Qualcomm as a separate, publicly traded company. Each Qualcomm shareholder received one share of Leap stock for every four shares of Qualcomm held. Earlier this decade, Qualcomm began investing in wireless telephone service companies as a way to prove its CDMA would work. As the technology became more established, Qualcomm found itself acting as both a service provider and equipment manufacturer, at times competing against its own customers. To stop that practice, and clarify with investors its mission, Qualcomm shed Leap to concentrate on its core R&D and manufacturing businesses. White, Qualcomm's president at the time, left to take Leap's helm.
Yet strong company ties remain. Qualcomm has extended a $265 million line of credit to allow Leap to initiate its projects. Leap has agreed to use nothing but Qualcomm technology for at least five years -- that means Cricket customers buy Qualcomm phones -- and, although it owns no shares at present, Qualcomm has retained warrants to purchase Leap stock.
Building the infrastructure to become a wireless service provider takes a significant amount of human capital. Leap has 69 full-time employees. Some of them, like CEO Harvey White and chief technology officer Mark Kelley came out of Qualcomm. Others, like Argay, have been recruited to the new enterprise. Still more, who do not show up on the Leap rolls, work for Leap's operating partners.
Building, owning and operating wireless communications networks in domestic and international markets has some striking inherent advantages and disadvantages. On one hand, the only way is up since industry wisdom says that wireless is the most efficient way to increase teledensity (the number of phone lines per 100 inhabitants). On the other, are issues of underdeveloped infrastructure, economic volatility and funding crises. Leap has dealt with all of those, especially in its international markets.
A quick tour of Leap's other projects shows the company has had a very busy first eight months. Leap, and its operating partners, have launched service in Chile, Mexico and Russia. In those parts of the world opportunity is huge.
In the United States, CDMA is primarily used in portable wireless telephones that are secondary to the lines in homes and offices. But the parts of the world which never installed those copper lines see the technology differently. In those places the Wireless Local Loop system, whether based on CMDA or a competing technology, is not considered an option for telephone service, but rather the only choice.
"In the international marketplace where there is low teledensity, we will change the way people communicate," says White. For starters, Leap will provide most with their first phone. Soon, White predicts, some international visitors to the United States will be puzzled by the telephone wires in our walls. "Let's say there is a developing country with 3 percent teledensity (the number of phone lines per 100 inhabitants) and the government wants to raise that to 10 percent," says White. "Most likely that increased teledensity is going to be wireless. That means that more than twice as many phone lines will be wireless than wire line."
Leap's International Focus
Teledensity in Mexico is 9.7 percent and wireless penetration is only 3.4 percent, so the growth potential is huge. Into this void has stepped Pegaso PCS, a consortium of companies that includes Leap. The digital wireless service was launched in February in Tijuana, and by year's end will include Mexico's three other largest cities, Mexico City, Monterrey and Guadalajara. Pegaso PCS also has announced a first-of-its-kind roaming agreement between Pegaso PCS and Sprint PCS to offer competitive cross-border wireless communications in selected southern binational areas, starting with San Diego and Tijuana.
In Chile, with a market of 14.9 million potential customers, teledensity is 16 percent and only 6.5 percent of Chileans use wireless services. In the second quarter of the year, ended Feb. 28, Chilesat, a company fully owned by Leap, reported 27,000 subscribers, a 59 percent increase from the first quarter.
In April, Leap launched service in its first Russian market, in a joint venture formed by its Russian partner, Metrosvyaz. The effort is expected to initially add up to 10,000 new phone lines (A wireless connection still is called a line.) in the area around St. Petersburg. Metrosvyaz' joint ventures plan to provide service in at least eight additional regions in 1999, targeting Russian families who want basic phone service as well as the business community. Metrosvyaz was formed in 1996 in close cooperation with Russian telephone holding company Svyazinvest. Through a holding company, Leap indirectly owns 35 percent of Metrosvyaz.
Leap has yet to launch service in Australia where it owns a 100 percent interest in OzPhone Pty Ltd. That company has licenses to provide both fixed and mobile service in three major regions of Australia. Teledensity in Australia is 50 percent and wireless penetration is 29 percent, but Australia's age and income distribution make it a growth market. Service could begin in late 1999 or early 2000.
The Money
It takes a lot of money to launch wireless communications projects. The investments in infrastructure and licenses are staggering. Leap's Mexican partner, Pegaso PCS, in which Leap owns one-third interest, is making an initial investment of $1.3 billion to deploy the country's first 100 percent digital network.
In Chile, Leap's partner, Chilesat PCS, launched commercial wireless service in September. Chilesat is the first carrier in Latin America to offer a nationwide network using CDMA digital technology. Leap originally owned a 50 percent interest in Chilesat PCS but in April, in a $50 million transaction, it purchased the remaining half due to financial problems with its partner. White is looking for a new equity partner, but says he will take his time and be selective.
In the United States, Leap spent $18.7 million at a government auction for licenses in 36 markets. Last October, Leap agreed to pay AirGate Wireless L.L.C. $19.45 million for a license covering markets in North and South Carolina. Leap also agreed to boost its stake from 7.2 percent to 100 percent in ChaseTel, the partner it joined with in launching Cricket.
The coin of the realm in wireless communications is POPS -- or potential customers. Through its operating companies in Chile, Mexico, Russia, Australia and the United States, Leap has licenses covering 173 million POPS, of which its equity share is about 81 million.
As part of the application process for domestic spectrum, Leap Wireless is seeking "designated entity" status, which entitles small businesses to preferential pricing and payment terms when acquiring PCS frequency in the C and F blocks. Western Wireless Corp. and the U.S. Small Business Administration are among those protesting Leap's request for designated entity status. They say Leap remains too closely tied with Qualcomm. White disagrees. "We strongly believe we are qualified and hope they (the FCC) will come to the same conclusion," he says. If Leap fails to get designated status, it still can partner with companies that have the special status.
Not surprisingly, Leap is losing money. It lost $19.5 million in the second quarter after losing $11.4 million in its first quarter as an independent company. White says the losses are part of the typical development cycle for a wireless communications carrier where the equipment must be in place before customers are solicited. Shareholders apparently understand. After hovering around $5 for the first six months, Leap's shares (LWIN on the Nasdaq) zoomed above $20 and were about $18 in late May.
Leap has a plan to change the world of communication. Expensive, yes. Possible, absolutely. It is clear that consumers in the United States will have a choice in the near future about whether to cut the cord with their telephone company. It also is clear wireless "everyday service" will be ubiquitous internationally long before it is here in the United States. While Harvey White's company doesn't have plans to offer service in San Diego, we can still enjoy watching another local telecom competing on the national and international stage.
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