Blog Post

Prepaid Competition Takes a Bite Out of MetroPCS Earnings

metroMetroPCS (s pcs), the prepaid cellular service provider, this morning reported a weaker profit and a drop in new subscribers for the second quarter, and analysts are blaming the increased competition among prepaid plans. The carrier, which has been reporting record quarters, only added about 206,000 subscribers in the most recent 3-month period, compared with 684,000 in the first quarter. The relative slowdown in new subscriber adds was surprising given that the second quarter marked the first full quarter in which MetroPCS served the New York City and Boston markets. Compared to the same period last year, profits fell by 48 percent to $27.2 million and revenue rose 27 percent, to $859.6 million.

In the last few quarters we’ve seen some aggressive pricing plans from other prepaid carriers with Tracfone, which is owned by Mexico-based America Movil SA, offering unlimited plans for $45 a month, and Sprint’s (s s) Boost subsidiary offering unlimited voice and text for $50 a month. Other carriers have followed suit.

In March, when I interviewed MetroPCS COO Tom Keys and asked him about the new $50-plans, he didn’t sound worried:

Keys: So, let’s start with Boost first. I think this is the 12th unlimited plan that Sprint has offered. I’ll let them figure out if this is sustainable or not, but we don’t see any issue with it. As for T-Mobile [whose plan requires] 22 months loyalty, what are they trying to do here? Get you two months before your contract expires. That’s not a play against Metro’s customer base or Metro’s customers. This is a save program.

Sustainability will be key as competition becomes more cutthroat among those offering prepaid plans. Figuring out how to operate a network and provide the minimum amount of service needed to keep customers happy while cutting prices and making a profit is going to be a balancing act. Keys told me in our interview that the issue will be how cheaply carriers can support their existing customers while acquiring new ones. Analysts, however, look more closely at numbers like the average revenue per user. MetroPCS is seeing its ARPU remain relatively high compared with other prepaid plans.

Second-quarter ARPU at MetroPCS fell to $40.52 while its churn rate rose to 5.8 percent, up from 5 the first quarter of the year. In comparison, Sprint saw a gain of 770,000 subscribers to its Boost prepaid brand during the second quarter, as ARPU in that division rose to $34 and churn hit 6.38 percent. Leap Wireless (s LEAP), which operates the Cricket prepaid service, is due out with its second-quarter results this afternoon, so we’ll see if they give us an even better read on who’s winning in prepaid, not just from a customer standpoint, but from a profit-generating standpoint.