Lack of iPhones hurting budget carriers

MetroPCS Communications Inc. and Leap Wireless International Inc., the two biggest prepaid mobile-phone carriers in the U.S., are watching the iPhone’s booming sales from the sidelines.

Apple Inc.’s device – the best-selling smartphone at AT&T Inc., Verizon Wireless and Sprint Nextel Corp. – isn’t available from MetroPCS and Leap, which typically offer lower- end models to users who don’t want monthly contracts.

Getting locked out of the iPhone market may be taking a toll on prepaid carriers – an area that’s been one of fastest- growing parts of the mobile-phone industry, fueled by young people and lower-income consumers wanting a phone without having to go through a credit check and other hassles. MetroPCS added 82 percent fewer subscribers in the first quarter than a year earlier, while Leap drew 22 percent fewer.

“We are seeing the impact of the iPhone,” said Avi Greengart, a research director at Washington-based Current Analysis.

The first-quarter results of MetroPCS and Leap, both released in the past 24 hours, sent the stocks tumbling today in U.S. trading. Leap dropped 20 percent to $6.14, the biggest decline since August. MetroPCS decreased 11 percent at $7.08, also the worst since August.

MetroPCS, based in Richardson, Texas, netted about 132,000 new customers last quarter, missing a Piper Jaffray Cos. estimate of 350,000. San Diego’s Leap added 258,000.

Costly Promotions

In addition to the decelerating growth, the prepaid carriers have had to step up promotional pricing and rebates, crimping profit more than analysts had anticipated. In contrast, the three carriers – Verizon, AT&T and Sprint – all topped analysts’ estimates, helped by iPhone sales.

The Apple device made up 78 percent of AT&T’s smartphone sales in the first quarter. At Verizon, which added the iPhone to its network more recently, the product accounted for 51 percent. The company relies more on models running Google Inc.’s Android operating system.

Apple’s profit almost doubled to $11.6 billion last quarter, lifted by the surging popularity of the iPhone, while revenue jumped 59 percent to $39.2 billion. The company sold 35.1 million iPhones in the period.

Prepaid carriers also face more direct competition from traditional mobile-phone services. When it started, the MetroPCS $50 month-by-month unlimited service plan was an attractive alternative for consumers who didn’t want to be locked in to more expensive two-year contracts. Now those users can get similar prepaid plans from the top three carriers.

Smartphone Demand

The broader shift to smartphones also hasn’t helped, said Mark Winther, an analyst at research firm IDC in New York. The networks of the prepaid carriers aren’t as well suited to the data downloading required by those devices, and that may be pushing customers away, he said.

“MetroPCS’s high churn rate may be the smartphone users disgruntled by bad performance, and going to another carrier,” Winther said.

The promotional pricing, meanwhile, is hurting MetroPCS’s profit margins, Christopher Larsen, an analyst at Piper Jaffray, said in a report. The company’s adjusted earnings before interest, taxes, depreciation and amortization were $262 million, 23 percent below his projection.

The cost of adding new customers rose 50 percent at MetroPCS. A $30 mail-in rebate implemented in March and other promotions have ramped up those expenses, John Hodulik, an analyst at UBS AG in New York, said in a research note.

Takeover Plan

Sprint considered buying MetroPCS, only to have its board vote down the acquisition, two people familiar with the plan said in February. The board decided the stock-and-cash transaction, which may have cost as much as $8 billion including debt, would have been too expensive given the current level of Sprint’s stock price.

The entire wireless industry is facing slowing growth as the market becomes saturated. The number of wireless devices, including tablets, now exceeds the number of people in the U.S., said Bob Roche, a statistician with the trade group CTIA.

That’s forced the big carriers to fight harder for market share, said Current Analysis’ Greengart. Smaller companies are increasingly in their cross hairs, he said.

“With the big guys still growing in a saturated market, the new customers have to be coming from somewhere,” he said.