Tough times continue for wireless carriers at the lower end of the spectrum as they struggle to move into the smartphone era. Things got a little bit better for Leap Wireless yesterday, as it narrowed its losses and added more customers than expected, but got a little worse for MetroPCS Tuesday with earnings below what analysts had forecast.
When phones were dumber, it was easier to for carriers to compete on price and voice quality, but that era is fading and the new one is bringing a whole lot of complexity to carriers like Leap and MetroPCS. Investors were pleased with how Leap handled itself during the third quarter, cutting its losses from the prior year and adding more customers than expected. The company credited higher smartphone adoption in part for the improvement, which produces more revenue per user than a regular old phone.
But MetroPCS is not having a good day. Despite posting better overall numbers than Leap, it missed analyst expectations for earnings per share by two cents in part because it is spending so much money on subsidizing higher-end smartphones to offer its price-conscious customers.
It’s a tough position: smaller carriers like MetroPCS need the same types of smartphones as the big guys to be competitive, but they have less cash with which to obtain those phones. Just look at the huge deal Sprint (NYSE: S) signed with Apple (NSDQ: AAPL) just to be able to offer the iPhone 4S: very few people in the U.S. pay the actual cost of a smartphone, they pay a much reduced cost thanks to subsidies from carriers, who know they can make back that money by insisting on a two-year contract.
That’s why it may not be surprising to see smaller carriers start to consider banding together, especially if AT&T (NYSE: T) is allowed to buy T-Mobile. They’ll have to have more resources both to compete for smartphone deals and to build out advanced data networks.