MetroPCS (NYSE:PCS) had a rough Tuesday. The stock dropped more than 30% before midday, its shares crumbling above $16 to just around $11. It’s not surprising. The mobile phone provider reported its second-quarter earnings Tuesday morning, and its results could be described in the same way as a hurricane hitting the coast: disastrous.
In the first quarter of 2011, MetroPCS reported its best-ever period of customer growth, but it added fewer than 200,000 new customers in the second quarter, far below the estimates of 225,000 from analysts at JPMorgan. The company shed customers at a rate of nearly 4% during the quarter, and it expects declines to continue. Profits came to $84 million and revenue totaled more than $1 billion — year-on-year increases of 5% and 19%, respectively, but still well below analyst expectations.
“We do see it being tough out there currently,” said Metro PCS COO Thomas Keys. That’s putting it lightly. As the costs of both smartphones and data plans for AT&T (NYSE:T) and Verizon‘s (NYSE:VZ) 3G networks drop, the role smaller mobile telecoms like MetroPCS play in the mobile market is diminishing at an alarming (at least for their shareholders) rate. Leap Wireless (NASDAQ:LEAP) suffered nearly as much as MetroPCS on Tuesday, shedding more than 18% of its value before even reporting its second-quarter earnings Wednesday.
This is, unfortunately, the nature of the mobile provider business going forward. Metro PCS and Leap are the sixth- and seventh-place mobile providers in the United States, with customer bases of approximately 9 million and 7 million consumers. In contrast, AT&T has nearly 96 million subscribers. If and when it merges with T-Mobile USA at the beginning of 2012, its subscribership will grow to nearly 130 million.
Not only that, but T-Mobile also will bring in a system of lower-cost phone and data plans — the services that providers like Metro PCS and Leap specifically specialize in. Those smaller companies will continue to lack access to popular, cheap phones like previous generations of Apple‘s (NASDAQ:AAPL) iPhone.
The fact is that by 2013, there might be just three mobile phone providers in the United States. Unless something dramatic happens for Sprint (NYSE:S) — the current third-place mobile provider, with a base of around 52 million subscribers — it’s possible the sole remaining players in the mobile telecom business will be Verizon and AT&T.
Can MetroPCS, Leap and their peers turn things around? Possibly, but only if they reinvent their services. Smaller telecoms could find safety in reorienting their business model around Web access rather than phone services and using VoIP (voice over Internet protocol) services like Microsoft-owned (NASDAQ:MSFT) Skype for voice plans. Even then, it would have to undercut AT&T and Verizon so heavily on price, for both service and devices, that it might not be worth it. Welcome to the new mobile market.
As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.
