AT&T Looks to Leap Wireless Acquisition to ‘Accelerate’ Its Prepaid Business

AT&T believes its $1.2 billion bid to buy Leap Wireless will “accelerate our entry into the prepaid segment much more so than we would have been able to do by ourselves,” said AT&T Mobility President Ralph de la Vega Tuesday on a quarterly earnings call. For Q2, the carrier added a net 551,000 postpaid subscribers and 11,000 prepaid subscribers (CD July 24 p16). AT&T began offering a new prepaid service, Aio Wireless, in early May (CD May 10 p19). The carrier believes there is “a strong growth opportunity” in prepaid, de la Vega said.

AT&T appears to be interested in Leap mainly because of its spectrum holdings (CD July 16 p1), but de la Vega said AT&T plans to keep operating Leap’s Cricket prepaid brand, which he said “will ignite our growth into all aspects of the prepaid segment that I think has some really nice growth opportunities for us.” AT&T’s expansion in prepaid will be “very good for competition in the prepaid segment,” said AT&T Chief Financial Officer John Stephens. Stephens declined to go further into the deal during the call, but said he expects the deal will close successfully after government regulators give it “a fair review."

AT&T’s postpaid subscriber gains included the addition of 398,000 tablets during Q2; 88 percent of the carrier’s postpaid mobile phone sales were smartphones. About 73 percent of AT&T’s postpaid subscribers now use smartphones. The carrier said its customers’ average wireless bill now totals $66.12 on rising mobile data usage. AT&T’s data usage per smartphone is growing 50 percent year-over-year, with more than 25 percent of subscribers who use the carrier’s shared data plan now buying at least 10 GB of data usage per month, de la Vega said. “I feel really good that we have prospects to continue to grow usage and to get customers to buy bigger buckets in the future,” he said.

AT&T is also confident that its early smartphone upgrade program, called Next, will be popular, de la Vega said. The plan, announced earlier this month, will allow subscribers to pay for a smartphone in installments over a 20-month period, with an option to upgrade to a new phone every 12 months (CD July 17 p17). Customers “essentially wanted to upgrade their phones in a yearly cycle, which is typically when they get refreshed and they wanted to do it with minimal outlay,” de la Vega said. The upgrade portion of the program will also allow AT&T to capture additional revenue by refurbishing phones its subscribers trade in and resell them in its stores, Stephens said.

AT&T’s wireless business appears to be “less profitable” than expected, said New Street Research analyst Jonathan Chaplin in an email to investors. The carrier’s subscriber additions were solid, but they “came at greater than expected cost, driven by increasing competition from a reenergized” T-Mobile US, he said. “We believe competitive headwinds will stiffen in coming quarters.” T-Mobile and Sprint are “angling for a recovery” in the wireless market, with both looking to directly target AT&T, said Moffett Research Senior Analyst Craig Moffett in an email to investors. “The question going forward is, what will AT&T do about a resurgent Sprint and T-Mobile?”