Cellular cricket free phone

Qualcomm spin-off Leap Wireless bounds into wireless with its local-area-only Cricket service.

Sheril Walker cut the cord. The Chattanooga, TN, beauty-salon owner got rid of her landline service in favor of wireless. She credits a cricket for helping her make the decision. Sound like something out of a Disney fairytale? It's not. Walker replaced both her home and business phones with Cricket wireless service, a relative newcomer to the industry. In so doing, she was able to save about $400 over her former landline-service provider.

Susan Swensen, Leap Wireless president & COO, and the senior executive in charge of launching Cricket services, points to Walker's experience as just one of the examples that her company is succeeding by serving an often-overlooked market and offering prepaid limited-area service.

Unlike the Sprints and AT&Ts of the industry, Cricket's entire business plan is founded on the local-service-area model. Built around a prepaid voice-exclusive product, the model is designed to provide subscribers unlimited calls for a flat rate of $29.99 a month. Cricket customers don't have access to data or Internet services and can't make or receive calls outside their restricted calling area.

With headquarters in San Diego, Leap Wireless, parent company of the tiny Cricket, opened for business in 1998 headlining four operating companies in four countries. Recently, Leap sold its Chilean venture, Smartcom PCS, for $300 million, and now owns only Cricket and Pegaso of Mexico.

Although Leap owns or has the rights to acquire operating licenses in 27 states and plans to launch service in eight other U.S. markets this year, Cricket currently is available only in Chattanooga and Nashville, TN. But Swensen said the limited launch proved to be helpful.

"Only having service in two markets, we were able to work harder on achieving better numbers for our investors," Swensen said. "That paid off because people are more willing to invest in something that has been proven versus something that is promised."

Consequently, Leap was able to raise $900 million earlier this year.

Swensen, a 20-year telecom veteran who came to Leap after five years as Cellular One president & CEO, said so far Cricket has found this niche market profitable.

Leap's operating revenues for the three months ending May 31 rose to $36.7 million, a 120% increase from the prior quarter.

Blake Carter, Tejas Securities Group senior analyst, called Leap's model for Cricket a huge success.

"They may only be in a few markets right now," Carter said, "but they continue to increase their number of subscribers quarterly."

Today, Cricket's customers number 46,000, up from 37,000 last quarter. In its Chattanooga market, which launched in March 1999, Cricket managed 7.7% penetration in one year. According to Becky Diercks, Cahners In-Stat Group director of wireless research, that number seemed to be normal for a local-area-only provider. Diercks said high penetration is achieved much more quickly in a small-coverage market when compared to a nationwide provider.

Carter gives Leap a strong buy advisory and doesn't expect that will change soon.

"Even five years down the road, I think the outlook for Leap is very positive," Carter said.

Spend Less, Make More

In terms of running the business, Cricket's cost structure is lower than most

PCS companies. Leap spends less than $230 on acquisition costs per gross addition (CPGA). Using Qualcomm Thin Phones and office department stores such as Staples for distribution, Swensen credits a good CPGA for Cricket's marketing success. Cahners' Diercks said it generally costs most providers around $500 to $700 to acquire a new customer.

Because Cricket service is based on flat-fee pricing, there are no minutes of use (MoU) limitations and no need to keep detailed billing records. By not collecting that information, Cricket is able to save printing, mailing and even CSR time needed to handle customer-billing inquiries.

"We don't get calls from customers about calls they don't recognize," Swensen said. "That happens all the time (with other providers). (A customer) sees a number they don't recognize and they get on the phone to find Out what went wrong. We don't get any of those kind of customer calls."

Cricket also has been able to lower bad-debt costs significantly by exclusively offering prepaid service.

As for Cricket's network build-out costs, they are about one-third less then those of a typical PCS provider, due to the limited number of cell sites required for local-calling coverage only. After acquiring its Chattanooga market from ChaseTel, however, Leap found it necessary to expand the network in order to cover its planned 800-square-mile area. Swensen is quick to point out that neither of Cricket's markets is small. Nashville is about 2,000 square miles, and the Chattanooga market stretches to include a small part of Georgia.

Building the Network

Harvey White, Leap chairman & CEO, called CDMA the "natural choice" for Leap because it offered a more robust network with high capacity and a clearer 3G-migration path. Leap used Lucent products and technology to build its network and already is beginning to upgrade to the interim 1XRTT. Once the upgrade is complete, Leap will get a 100% boost in its 10MHz spectrum.

Cricket's CDMA network was created a little differently from others. Instead of fixing the price point according to what was needed to support the infrastructure, Leap built Cricket's network based on what it found customers would be willing to pay. According to White, this plan has paid off. It has enabled Leap to create an RF design based on capacity rather than coverage and greatly increase its speed to market.

One of Cricket's biggest challenges remains gaining the necessary permits from zoning boards. According to Swensen, short of any special treatment, Cricket has managed to navigate this process smoothly by meeting with the local jurisdictions and letting them know that Cricket is not just another wireless-service provider, but also could be a low-cost alternative to landline service.

"We would go there to tell our story," Swensen said. "This way they can see we are different. Then we don't look like the seventh competitor and the umpteenth wireless carrier out there. So they are working with us to see if there is a way to streamline the process. Not to give us any special consideration, but to see if there is a way to expedite our permits."

Cricket's Competition

Tejas' Carter said Cricket's main competition may come from outside the wireless industry. Commonly referring to their Cricket phones as extended cordless phones, Cricket customers tend to use their wireless phones more like home phones. Cricket's monthly MoUs are about 1,000 minutes per customer, closely resembling landline use. Swensen said Cricket does not intend to take the place of landline completely. For now Cricket is content to replace second or third residential landline phones and small-business office phones such as Walker's.

With only two markets launched, Cricket is not a top competitor, but Swensen remains optimistic. She said eventually Cricket will become a local-area-only service available in markets nationwide. She predicted Cricket's success will come from continuing to serve a market other wireless-service providers are passing up.

Cricket's voice-only product plans are a departure from the rest of the wireless industry's active pursuit of data. What are its plans for adding data and eventually competing with other wireless providers?

Both Swensen and White said data services will be investigated. But data would be added only if an innovative approach to the market could be found. Until then, Cricket's goal is to observe other providers' data experiments.

Carter said that so far, not offering data hasn't hurt Cricket. According to him, if Cricket never deploys data, it will continue to blossom because it's serving a less competitive market of low-income, first-time wireless subscribers.

"Other wireless companies will not (serve this market) because of the legacy of their networks," Carter said. "All of the other service providers have billions of dollars invested in wide-coverage data/voice hybrid networks, and it's not economically feasible for them to move away from their existing asset base.

However, Carter doesn't think the same is true for Leap's overseas offerings.

Leap will have to compete in the wide-coverage market abroad to make the same gains as its domestic properties, he said.

International Properties

In Mexico, Pegaso, which is available in Guadalupe, Mexico City, Monterey and Tijuana, has built its network a little differently from Cricket, due to the diverse market opportunities available there.