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Prepaid carriers see humdrum results in fourth quarter

MetroPCS and Leap Wireless offer a peak at their growth in the fourth quarter. It wasn't exactly sizzling.

MetroPCS and Leap Wireless' growth in the fourth quarter could be summed up with one word: meh.

Both prepaid wireless providers offered up an early look at their customer growth and the results were mixed. Leap Wireless, which sells service under its Cricket Wireless subsidiary, released its figures yesterday and narrowly beat expectations. MetroPCS reported its customer growth today, which fell slightly below analysts' expectations.

The results were neither tragically bad or particularly impressive. But given that the fourth quarter is the largest sales period for the prepaid players, that itself makes the results somewhat disappointing. That MetroPCS and Leap failed to make a better showing in the traditionally stronger fourth quarter only highlights the competitive landscape and the difficulties of operating in the prepaid business.

"These numbers are likely to be perceived as mediocre, at best," by Wall Street, Craig Moffett, an analyst at Sanford Bernstein, said in a research note. "Investors may be disappointed."

Fourth-quarter subscriber growth for MetroPCS was "not as robust as expected," Mizuho Securities analyst Michael Nelson said in a note.

Leap reported added a net 175,000 customers in the fourth quarter, narrowly beating out the 164,000 customers that Wall Street had projected. The results were helped by 65,000 customers added outside of its region, part of its plans to expand across the nation through a wholesale agreement with Sprint Nextel and several national retailers.

The company has successfully used its music service, called Muve, to differentiate itself from other bargain prepaid offers and reducing its turnover rate, which it expects to be between 3.7 percent and 3.9 percent for the period. It said it ended the year with 5.9 million customers.

MetroPCS, meanwhile, reported adding a net 197,000 customers in the fourth quarter, compared with the analyst estimate of 220,000. The company also reported a turnover rate of 3.7 percent.

Both companies are making the transition from basic prepaid providers to offering smartphones and data plans. MetroPCS was earlier in hopping on this trend, allowing it to benefit sooner, but Leap quickly followed.

Still, both companies face increasing competition from the likes of Sprint Nextel, which has two prepaid arms in Virgin Mobile and Boost Mobile, both of which offer smartphones and data plans on a no-contract basis. T-Mobile USA, meanwhile, offers a no-contract option as well. Larger carriers such as AT&T and Verizon Wireless have also shifted more into the prepaid area.

The prepaid business remains an attractive one because it remains one of the last area of real growth. The no-contract option is an attractive one to consumers who have been hit hard by the economic downturn and slow recovery, as a cell phone is now considered an essential utility, rather than a luxury item.

There also remains some room for growth in the first quarter, also considered a strong period for prepaid. Consumers, particularly ones who get their tax returns early, typically sign up for prepaid service in the first quarter.

Nelson noted that the last few weeks of the year were strong for MetroPCS, suggesting momentum entering 2012.

"Although we overestimated the magnitude of the strength for PCS, we are encouraged by the seasonal trends," he said.