Profiting from customers others avoid
Leap Wireless's earnings have jumped thanks to its strategy of catering to low-income customers in rural markets.
By Patrick Baltatzis, Business 2.0 Magazine reporter

SAN FRANCISCO (Business 2.0 Magazine) - Offering unlimited cell-phone plans to low-income customers in rural markets might seem like a recipe for financial disaster.

But Leap Wireless has actually profited from that formula. Just last month, the company reported $30 million in net income on $915 million in revenues for the 2005 fiscal year, and it now has 1.7 million customers.

That's a dramatic turnaround from 2003, when the wireless carrier filed for bankruptcy. Burdened by $2 billion in debt from its 1998 spinoff from Qualcomm (Research), Leap wasn't able to sign up customers fast enough to service its debt load.

The company reorganized its finances in 2004, but it stuck to its formula: Offering unlimited cell-phone service in mostly rural markets for a flat monthly fee of $45 or less.

Since it only owns local networks, Leap is unlikely to ever challenge Verizon (Research) Wireless, Cingular, Sprint Nextel (Research), or T-Mobile for high-paying business travelers and urbanites. But it has figured out how to profit on lower revenues - and analysts say it's poised for double-digit growth for years to come.

In a recent report, Lehman Brothers analyst Blake Bath writes that he expects Leap to outperform the market for the next 12 to 18 months, as it expands its service and signs up more customers.

"Bankruptcy enabled us negotiate new and better terms from our vendors and suppliers, reducing our cost of operation," says Dean Luvisa, Leap's chief financial officer. "Today we have a laser-sharp focus on costs."

Cheaper calls, cheaper customers

That focus shows up, more than anything, in Leap's customer-acquisition costs. Most cell-phone carriers spend liberally to sign up customers, advertising heavily and throwing in free phones when they sign up for service. On average, it costs a wireless carrier $360 to sign up a new customer.

Leap, by contrast, only spends $142 to acquire a customer. It advertises on local radio instead of national television, limits commissions to independent cell-phone retailers, sells a limited range of phones, and only offers three plans, topping out at $45 a month. Unlike most carriers, it only offers service in local areas, though it recently introduced a pay-by-the-minute roaming plan.

As a result, Leap is able to profit on average revenue-per-user of $40 a month. At Leap's rivals, average revenue-per-user ranges from $50 to $65 a month.

And that's despite the fact that Leap's customers are chatterboxes, using an average of 1,500 minutes a month - a level of service for which the four largest carriers charge $80 a month or more.

Cordless future

The most intriguing statistic about Leap is how many of its customers have cut the cord, dropping regular service from the local phone company. Today 52% of the customer base relies on their Leap phone as their only phone. That rate is more than 10 times the industry average, notes Bath in his report, thanks to Leap's unlimited calling plans.

Analyst firm Gartner Group predicts that by 2009, 99 percent of all new telephone lines will be wireless, and Luvisa says Leap is targeting customers who have yet to switch to wireless.

"The overall penetration rate for wireless services rate is 65 percent," says Luvisa. "The remaining 35 percent is the real opportunity."

Bath, the Lehman Brothers analyst, believes that Leap isn't vulnerable to a push to imitate its simple plans. For the big carriers, offering all-you-can-eat plans poses a big risk: Their best, highest-paying customers who today pay $100 or more for plans with thousands of minutes will switch over, cutting the carriers' revenues, which they cannot afford to do.

Sometimes, it seems, the best way to profit is to keep things simple. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.