Leap preparing for further expansion, pondering affiliates

Leap Wireless International Inc. is poised to make a large push into East Coast and Gulf Coast markets with the spectrum it acquired in the most recent federal spectrum auction. The carrier is also considering an affiliate program to build out the areas in which it owns spectrum, but which don’t fit into the company’s strategy of building clusters of urban markets.
According to a presentation by Leap Chief Financial Officer Amin Khalifa at the Bank of America 2006 Credit Conference in New York, the carrier’s recent spectrum purchases opened up opportunities in markets along the Gulf Coast, from Corpus Christi, Texas, to Baton Rouge and New Orleans, La. East Coast cities where Leap expects to launch new markets include Wilmington, Del.; Philadelphia; Washington, D.C.; Baltimore; and Richmond and Norfolk, Va.
The carrier also expects to launch service in Minneapolis; St. Louis; Oklahoma City; Las Vegas; Chicago and Seattle.
In areas where Leap has excess spectrum that it is unlikely to use-the company purchased some multi-state licenses in the nation’s midsection that cover both urban and rural areas-Khalifa said that Leap would consider possible affiliate programs, or swapping or selling spectrum.
The company has said that the first stage of its buildout is already fully funded, and is expected to start by the end of 2007 and extend into 2009. In general, Khalifa added, Leap plans to build out “as many of the large cities as fast as we can.”
Addressing overlap
Leap already knows that it is likely to overlap service with competitor MetroPCS Communications Inc., which also offers a flat-rate service.
Today, MetroPCS and Leap overlap only in Modesto, Calif., according to Khalifa-however, both companies came out of the auction with rights to spectrum in Seattle, Philadelphia and Las Vegas, where neither already offers service.
Khalifa said that making a return on investment is still possible in a market where Leap must compete with MetroPCS, but that it is obviously a better return if only one of the companies serves a given area.
He also noted that some of the markets Leap launched this year are already performing well. Houston, for example, was launched in the second quarter and is expected to break even this quarter.
Leap plans to add two more markets-Rochester, N.Y. and Raleigh, N.C.-by the end of the year, bringing its market launches for the year to 14. Leap offers service in 50 markets total, following the launch last week of service in its home market of San Diego.
Asked about Leap’s high churn rate, which has hovered around 4 percent, Khalifa said that four main factors contribute to the company’s churn: customers’ inability to pay their bills; young people who move and don’t end up in a Leap market; customers who end up traveling out of Leap’s footprint and roaming more often than they had anticipated; and customers who want hot, new handsets offered by other carriers.
Khalifa said that Leap is testing a $60 per month plan that includes 300 roaming minutes in three markets, as a possible solution to the problem of customers who spend a significant amount of time outside the carrier’s footprint. The carrier’s new markets will help it to reduce its churn by upping the chances that customers who move will land in another Leap market, he added-and noted that Leap designed its business model in anticipation of relatively high churn.
The carrier also has big plans for data services. Khalifa said that Leap customers send about 10 times as many text and pictures messages as customers at the major carriers, and that the company could be expected to add music downloads to its data services.
“We believe as we make further and further forays into data services, that the differences between us and our competitors will actually widen. We’re no longer competing just on voice,” Khalifa said.