Wireless August 30, 2010, 11:30PM EST

MetroPCS and Leap Take Prepaid Calling Upmarket

As subscriber growth slows, two big pay-as-you-go wireless sellers woo even business users with upgraded network equipment and pricier devices

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MetroPCS Communications (PCS) and Leap Wireless International (LEAP), two of the top sellers of pay-as-you-go wireless calling plans for low-income consumers, are targeting more-affluent users to spur growth.

Leap announced a deal this month to use the network of bigger rival Sprint Nextel (S). The company is trying to get greater shelf space at big box retailers, including Best Buy (BBY). MetroPCS is upgrading its network to deliver faster download speeds. Both companies are ramping up efforts to court business customers and release costlier devices such as smartphones.

The moves are designed to widen the appeal of prepaid calling so Leap and MetroPCS can gain more of the $152.6 billion U.S. market for wireless services. The existing pay-as-you-go audience is almost saturated and new mobile users favor multifeature handsets sold by such top providers as Verizon Wireless and AT&T (T) "Prepaid was always niche, very low-end," says Sam Simon, a scholar at New Millennium Research Council, a Washington-based think tank. "Now what competes with it is the smartphone."

MetroPCS is the third-largest provider of prepaid calling, which generates 10 percent of the industry's revenue, according to IDC, a research firm in Framingham, Mass. This indicates prepaid sales of about $15.3 billion. The market is led by TracFone Wireless, owned by America Movil SAB (AMX), Latin America's largest wireless provider. Sprint Nextel, based in Overland Park, Kan,, ranks second, with Leap at No. 6.

Leap aims to go nationwide in 2011

Concern about Leap's growth sent its shares to a record low this month and added to pressure to renew merger talks it has sporadically held with MetroPCS for more than three years, says Craig Moffett, an analyst at Sanford C. Bernstein & Co. "The prepaid market is not getting any bigger," says Moffett.

Leap plans to use the Sprint Nextel network to provide coverage nationwide starting mid-2011, compared with 36 markets now. Leap says the coverage would give it a bigger toehold at retailers such as Best Buy and Wal-Mart Stores (WMT). About 60 percent of Leap's users lack credit cards. "We are in big box today, and we are not taken very seriously," says Albin Moschner, Leap's chief operating officer. "We are not getting prime real estate." Leap, based in San Diego, slumped to a record low on Aug. 11, days after the money-losing company reported its first customer shrinkage, along with second-quarter sales that missed analysts' estimates.

"If you want to expand the market beyond urban, lower-income consumers, you need retailers," says James Ratcliffe, an analyst at Barclays Capital.

Dallas-based MetroPCS hired financial advisers to examine a potential purchase of Leap, two people familiar with the matter said in February. The companies quit talks in 2007 amid a disagreement over price. "We've kept open communication with a number of smaller carriers, and we—from time to time—do have discussions" with Leap, MetroPCS Chief Executive Officer Roger Linquist said, declining to say how recently the companies have met. Leap's Moschner declined to comment on merger prospects.