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Would AT&T Consider Acquiring Leap Wireless?

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Smartphones are becoming more accessible for individuals who do not want to sign multi-year mobile service contracts. As a result, carriers relying on postpaid phone service contract growth are feeling the pinch on their bottom lines. Will these carriers resort to innovative service bundles to unlock consumer value, or is the industry looking at a round of consolidation sometime in the near future?

Consumers can choose from two primary types of phone service plans: prepaid and postpaid. In prepaid plans, users pay for minutes and data as needed. One example of a prepaid service provider is TracFone Wireless. A postpaid plan is a contract that users typically sign for a commitment period of one to two years. These users pay for a set number of minutes and data on top of the cost of a phone. Sprint (NYSE: S) is one example of a postpaid service provider.

Postpaid plans are popular largely because they often offer users higher quality phones than prepaid plans. However, Apple's (NASDAQ: AAPL) iPhone has recently become available across several prepaid plans.

Analysts believe Leap Wireless' (NASDAQ: LEAP) Cricket and Sprint's (NYSE: S) Virgin Mobile might only be the first of many no-contract iPhone deals coming soon. In a sign of the difficult economic environment, lower-income consumers are not the only customers gravitating towards far cheaper, no-contract options.

In addition, reports show tempering growth of postpaid subscribers. That growth was just one percent for 2012's first quarter, according to Chetan Sharma, a mobile industry analyst. That compares to a growth of around 15 percent for prepaid subscribers over the same period.

As data becomes more available for prepaid phone service plan users, traditional postpaid mobile players such as Verizon Wireless (NYSE: VZ) and AT&T (NYSE: T) are adding a feature prepaid providers have not yet tapped: shared data plans. Verizon Wireless is expected to have its “Share Everything” family plan by the end of June. This plan allows subscribers to share data with as many as 10 devices to the plan.

AT&T may also be considering adding new data plan options. The company's CEO, Randall Stephenson, hinted that the carrier might offer data-only plans within two years. Further out, Stephenson and other industry insiders see postpaid plans becoming part of larger bundling in the mold of cable, internet and home phone services.

In order to cope with harsher prepaid competition, large mobile players might simply consider acquiring high-growth prepaid carriers.

In a note, Sharma said, “The AT&T-T-Mobile merger might not have gone through but that doesn't stop industry to play the M&A speculation parlor game. Except for a few impossible scenarios, all sorts of deals are being contemplated. The market economics is clearly crying out for more consolidations.”

To this end, large players like Verizon or Sprint Nextel might consider acquiring a company like T-Mobile USA to gain exposure to the prepaid phone service market . Small-cap regional players such as Leap Wireless might be even more immediate candidates for acquisitions.

Friday, the Vanguard Telecommunication Services ETF (NYSE: VOX) traded around 0.4 percent higher for the session.

Latest Ratings for S

DateFirmActionFromTo
Dec 2014OppenheimerDowngradesPerformUnderperform
Dec 2014HSBCInitiates Coverage onOverweight
Nov 2014Bank of AmericaMaintainsUnderperform

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