Despite widespread use around the world, prepaid cell phones have never really caught on in the U.S., where two-year commitments stubbornly refuse to go away. But two companies whose fate depends on prepaid have watched their fortunes plummet during what is typically a strong quarter.
The Wall Street Journal is reporting on some big losses at Leap Wireless and MetroPCS, two of the bigger players in the prepaid wireless market. Both companies noted "an abrupt slowdown in customer growth" during the last quarter, which has traditionally been their strongest.
"Consumers in the industry have faced some challenges this quarter," explained Leap Chief Executive Doug Hutcheson during a conference call with analysts. "We expect to see continued headwinds and competition in the industry."
Part of the problem comes from larger carriers such as Sprint and T-Mobile luring away low-income customers on government subsidies with free phones, particularly with attractive flat-rate, no-contract plans.
MetroPCS signed up a mere 131,654 new customers in Q1 2012, a sharp drop of 82 percent over the same quarter last year. Net income also fell 63 percent to $21 million, while Leap's fortunes dropped 2.2 percent to $98.4 million.
Both companies have noticed an uptick in existing customers switching from basic phones to smartphones, a trend that weighs heavily on corporate profits due to the higher upfront costs. While larger carriers prefer smartphone customers because they're considered less likely to cancel service, those same customers can be "a particular challenge" for prepaid.
Despite the lure of handsets such as Apple's iPhone -- which is not eligible for prepaid service through most of the carriers handling it in the U.S. -- the churn rates (customers leaving a carrier) for Leap and MetroPCS remained mostly consistent, with the latter jumping to 3.3 percent and the former holding strong at 3.1 percent.
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