There is a price war starting now in the prepaid mobile sector. MetroPCS wants to attract new customers (and keep its current customers) by paying all their taxes and fees, which amounts to a price cut of $10. Technically the list prices remain the same but instead of the customers paying all the taxes and fees, MetroPCS picks it up. Since the 6.6 million MetroPCS customers are not under any contract, all of them can get this $ 10 price cut – a profit loss of $66 million a month!
MetroPCS said that they will make up for the lost profit through increased addition and retention. But the stock market is not buying that argument. To compensate for $66 million lost profit MetroPCS must add, at least, a total of 1.65 million new subscribers (assuming a generous profit per customer of $40). That is 25% of its current subscriber base just to get back to where it was before the price cut.
MetroPCS has a churn rate of 1.77% per month (percentage of subscribers who quit). Even if it acquires additional 1.65 million subscribers, it has to find 144,000 new subscribers every month, unless it reduced the churn rate. The lowest churn rate in the industry is 1.1% but that is for subscribers under contract. Prepaid customers are by definition susceptible to high churn.
Other prepaid players like Boost and Leap are not going to stand still. MetroPCS said it wants to be the low price leader but tha is possible only of other prepaid operators cannot match the price cut. Since the marginal cost to serve one single customer is $0 and all the investments in the infrastructure are sunk, no one player can claim price leadership. If Boost and Leap match the price cuts, MetroPCS will simply end up with lower profits despite gaining some customers.
It is not a surprise that the stock market is feeling less positive about all the prepaid operators. War results in destruction and casualties and price war leads to value destruction.