LEAP TAKES ITS SHOT AT FLAT-RATED SERVICE
IN CHATTANOOGA; EXISTING OFFERINGS
SUGGEST THE MODEL CAN WORK IN SOME
MARKETS
(thanks to Phillips Telecom)
After several months of hints, Leap Wireless International Inc. [LWIN] unveiled its vision of CDMA-based wireless local loop
(WLL) service in the United States. Chase Telecommunications Holdings Inc.-which is in the process of being acquired by
Leap-has assumed the name Cricket Communications, shut down its conventional CDMA service in Chattanooga, Tenn., and
begun offering what amounts to a flat-rated prepaid service with all the local calls you can eat for $29.95 a month. It's not the first
such offering, however, and we'll look at lessons learned by some other carriers that already have flat-rated local offerings out in
the market.
Cricket's "comfortable wireless" service includes unlimited local calls-both incoming and outgoing-as well as voice mail and caller
ID. The service makes wireless about as simple as it can be for customers. No keeping track of airtime, no contracts, no credit
checks. The reason is that it's prepaid. Instead of paying for the month they've just used, customers pay at the start of the month.
Even long-distance is simple: there isn't any. Customers can place long-distance calls through the system, but only by purchasing a
separate prepaid long-distance calling card.
Cricket's Comfortable Wireless Goes After Local Calling Market
In addition to the lack of long-distance, Cricket does not support roaming to other networks. The service is aimed at what Cricket
calls "the vast majority of people who want to use their wireless phones for local calls within their metropolitan area."
The big question is whether Leap can pull it off. The conventional wisdom is that WLL has a great future in developing countries
where wireline infrastructure hasn't reached rural areas and moribund bureaucracy makes even urban customers wait years for
installation. In the ubiquitous wireline environment of the United States, however, the economics of WLL are generally considered
risky at best.
...Will The Struggle Be To Find Customers Or To Squeeze Them In?
In order to compete with wireline, Cricket has cut its price to the bone. The first question that comes to mind is whether the
company can actually make any money selling unlimited airtime for $29.95. There are some costs that Leap can control, and the
company has clearly optimized its offering to do just that.
For example, the fully prepaid nature of the service as well as the lack of roaming and long-distance components means that
Cricket's billing system can be practically non-existent. The company will not need to do detailed bills, or provide extensive call
center support to tell customers how many minutes they have left in their buckets.
The next big question is capacity. The conventional wisdom-and the actual experience of Internet service providers and other
business models with some similarities to wireless-is that unlimited usage will lead to just that, wireless phones being left on as
baby monitors and the like.
From discussions with analysts, however, it appears that Leap is trying to convince people not that it can handle a rush of capacity,
but that it can sell a purely local service. According to Sharon Armbrust of Paul Kagan Associates Inc., Cricket is shooting for
a 5 percent penetration rate in Chattanooga over the next three years.
"Historically, the perception of customers has been that they want a lot of coverage and the ability to go places even though they
may never go anywhere," said Armbrust. "So the real question is, is there demand for a very specific localized service? There's
certainly one for fixed service with unlimited use." The issue then, according to Armbrust, is which weighs more heavily into a
purchase decision, the unlimited flat rate or the geographic restrictions.
...Unlimited Works Well As A Sideline
Fortunately for Leap, there are actually some other PCS operators out there that may be toiling in relative obscurity, but have
come up with business plans not dissimilar to Cricket's. From their experience, it looks like the answers to the big questions about
customer demand, capacity issues, and profitability have workable solutions.
In January of last year, CDMA carrier WirelessNorth introduced its Unlimited Minutes Plus plan, offering unlimited local calling
at $75 per month alongside a more traditional measured offering (see PCS WEEK, Jan 14, 1998). More recently, St. Cloud,
Minn.-based Lifecom-also a CDMA operator-began offering a stripped down unlimited local calling plan with no added features
or roaming for $29.95 per month. While neither plan is exactly like Cricket's-both include the ability to place long-distance calls, for
example-both companies report strong customer acceptance and a surprising moderation in usage.
"We've got a handful of guys that blow the doors off," said WirelessNorth Director of Sales and Marketing Dan Richards.
However, Richards joked that "I only know one that hits up in the 8,000 minute mark, and I can't throw him off because he's a
dealer."
Lifecom General Manager Bill Castell said his company arrived at unlimited local service more or less by necessity three months
ago. Because of coverage issues in the remote St. Cloud area, Lifecom was having trouble selling its PCS service alongside its
more extensive cellular operation. Castell said the company decided to try selling its service against wireline service with no
features at all for $29.95 with unlimited airtime. Usually standard features like caller ID and voice mail are available from an a la
carte services menu for a small additional fee, much as they are sold by wireline carriers.
Lifecom's offering is now entering its third month, and Castell has been very pleased with the take rate. "In six weeks we
managed to gain about one quarter of 1 percent penetration of our entire market population at minimal upfront cost," he said.
At the same time, average usage has been a surprisingly comfortable 475 minutes. "That's been a very favorable return," he said.
Although Lifecom is watching usage figures closely, and is ready to stop taking on new subs if necessary, capacity has not been a
problem so far.
This largely mirrors WirelessNorth's experience in which capacity has not been an issue although 25 percent of the carrier's
customer base is now on the unlimited plan. WirelessNorth's Richards is very happy with his unlimited customers. "They're pretty
quiet customers," he said. "They use it, they understand the limitations, they tend to stay in our system." Based on periodic
customer surveys, he said, "They're about the happiest customers we have."
...How Low Can You Go?
Interconnection costs have also not been a deal breaker. This is particularly true at WirelessNorth's $75 pricetag. "We're
averaging more than $50 a month in revenue after interconnect costs have been taken out," said Richards. However, despite an
interest in trying a $50 no-frills plan if it could be done without cannibalizing the current base, Richards was skeptical of a $29.95 a
month plan. If WirelessNorth is clearing somewhere near $50 after interconnection on a $75 a month plan, it suggests that the
company is spending more on interconnection than Lifecom or Cricket could afford to-but Richards wasn't separating out unlimited
customers from the 75 percent of his subs on traditional service. In general, WirelessNorth is treating unlimited as a profitable
sideline rather than building its business model around the service. "We have a targeted revenue per subscriber we need to hit, and
it ain't $29.95," said Richards.
For Lifecom, however, $29.95 seems to be plenty of room. According to Castell, the company pays less than a penny per minute
for termination, which would place its total bite at less than $5 for the average sub, even if all those minutes were going from
Lifecom to the local wireline carrier, which isn't the case.
So there is evidence that Cricket's plan can work, at least in smaller markets with less likelihood of developing capacity-gobbling
hot spots. Even if capacity does ultimately become an issue, it's the kind of problem you want. Lifecom, for example, uses a hybrid
network of base stations and repeaters, and could simply replace repeaters with base stations if necessary.
My gut feeling is that Cricket will get a bigger response than the analysts anticipate. Remember Digital One Rate, which racked
up huge customer numbers at $90 per month and drew users well beyond the expected high-end business traveler segment.
Unlimited local calls will probably not replace wireline service, but it is the most aggressive move yet by the wireless industry to
take a chunk of the growing second line market. While some customers will probably be put off by the lack of range, the fact
remains that most wireless calls are local. In particular, Cricket stands to sell a number of phones to the same parents who give
their children pagers as a means of keeping in touch. With per-minute charges gone, parents can give their teenagers phones and
let them talk to their hearts' content.
ANALYSTS' REPORTS SETTLE ALL THOSE PESKY
3G QUESTIONS
(thanks to Phillips Telecom)
Who knew it was that simple? The International Telecommunication Union (ITU) and pretty much every other official and
unofficial body on the planet are still trying to figure out how many 3G standards there will be and who wants which ones, but why
wait for them? 3G Cellular Market Opportunities, a new report from Tempe, Ariz.-based Forward Concepts Inc., has it all
figured out now for companies that don't want to wait to make strategic decisions.
By 2005, the report expects the worldwide 3G handset market to be worth $9.2 billion, up from $1.5 billion in 2001. Infrastructure
starts at $1.3 billion in 2001 and peaks at $5.3 billion in 2003.
In the report's scenario, North America will be slow to start with 3G, getting service after Japan-which goes first within two
years-and Europe. There are three 3G standards: W-CDMA, cdma2000, and UWC-136. Europe mandates W-CDMA. In Japan,
NTT DoCoMo uses W-CDMA while everybody else goes with cdma2000, and all three fight it out in the United States. Satellite
systems provide the glue for travelers as there are no multi-mode terminals for a while. Worldwide 3G roaming comes into play
after 2005.
Hey, it could happen that way.
...Finally, Some Tangible Numbers On How Many Standards Are Best
For a different slant on the one vs. many 3G standards argument playing out around the world, check out European
Wireless/Operating Benchmarks: 1999-2003. The new study from The Strategis Group doesn't deliberately address 3G
issues, but it compares the performance of operators in Europe-where one mandated standard has brought interoperability and
economies of scale-and in the United States-where competition among several standards has driven innovation.
The study appears to offer evidence in favor of competition. It found that European carriers have higher penetration rates and
lower churn than their U.S. counterparts, and higher overall usage. However, European carriers also pay much more in operating
expenses per sub than hyper-efficient U.S. carriers. At the end of the day, the Europeans end up with slightly lower overall
revenue. For 1998, the study pegs European wireless margins below 40 percent, while U.S. operators achieved 42 percent.
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