Small Wireless Players Get Squeezed But Consolidation Still Far

Jacob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

U.S. wireless operators completed their earning season of sorts when MetroPCS (NYSE: TMUS) and U.S. Cellular  (NYSE: USM)  reported their quarterly results yesterday. While the large players had already announced their financial performance, the entire U.S. wireless pack, including Leap Wireless (NASDAQ: LEAP), has now revealed its report card for the latest period. Unfortunately for these second-tier operators, the numbers don't look good.

Both MetroPCS  and U.S. Cellular saw declines in their customer base. MetroPCS reported a 3.7% jump in quarterly revenues to $1.28 billion from the year ago quarter, but saw its earnings drop to $31.67 million in the latest quarter, compared with $91.27 million in the comparable period of last year.

However, this was in line with the Street's expectations, so the miss did not cause panic-selling. The market had developed an inkling of what to expect from MetroPCS, and as such, the stock has been trending lower since last week.

The company closed the quarter with consolidated net subscriber loss of 93,237. The company performed well on the LTE deployment front, ending the quarter and the year with 2.2 million LTE subscribers. This represented 25% of its overall customer base, after the company increasing its LTE device portfolio during the year.

U.S. Cellular saw its revenues increasing marginally to $1.12 billion in the quarter, but the operator sank into the red on the bottom line, with a loss of $39.6 million.Compare that to its $2.8 million profit in the fourth quarter of 2011. The company’s loss was not really unexpected, as it has been busy rolling out its LTE network across the majority of its footprint. The carrier lost only 10,000 subscribers during the quarter, but the market was not too pleased with the results, and sent the shares sliding by 5%.

Earlier, Leap Wireless – the smallest of the pack – also reported disappointing results. Its quarterly total revenue dropped 1.5% to $756 million, from $767.4 million a year ago. Although it was able to trim losses to $74.3 million, from last year's figure of $84.4 million, a 6% drop in subscribers during the quarter left investors worried. This amounted to a massive loss of 337,000 subscribers, and points to the fact that management’s strategy of signing up high-value customers through sales of smartphones such as the Apple iPhone is not working out.

As the latest results indicate, these mid-market carriers are somewhat sandwiched between both ends of the market. They're trying deploy their own LTE networks, but they lack the financial muscle to pull it off themselves. At the same time, their bigger rivals continue to snatch customers, thanks to better technology and deeper pockets.

This further corroborates the market’s view that smaller players often do not have bright futures in this capital-intensive business. While MetroPCS’ proposed combination with T-Mobile is a case in point, it is no secret that Leap Wireless is still trading at such high levels because it is a takeover target.

However, another round of industry consolidation appears unlikely anytime soon, since most operators have already placed their bets. Over the next few quarters, Sprint and T-Mobile will be progressing with their planned mergers with Clearwire and MetroPCS, respectively. Having already faced regulatory hurdles with its attempt to buy T-Mobile, AT&T (and by extension Verizon) might be more willing to try to scoop up one of these smaller players instead.

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