Past time for Leap and Metro PCS to merge

San Diego-based Leap Wireless has been rebuffing efforts by its frenemy MetroPCS to buy it since 2007. With the latest price cuts by the Big Four carriers, it is past time for the two firms to merge, gain economies of scale and attempt to go national before their market window closes.

Despite the bad blood between them — fueled by Leap’s belief that Metro PCS copied its CDMA-based Cricket Wireless business plan — the two companies finally formed a roaming alliance in late 2008.

Without a merger, each firm is presumably seeking its own exit strategy. Since Sprint is in no shape to buy either one, I’m guessing both Leap and Metro are hanging on in hopes of being bought by Verizon Wireless the way that Alltel was. However, this now seems an unrealistic hope. The Obama administration has signaled a much more hostile attitudes towards mergers by market-leading oligopolists than was ever true under the laissez-faire Bush administration.

Meanwhile, the Big Four are now responding to the pressure that Leap and Metro have helped place on their business models.

In the second half of 2009, the Big Four instituted drastic price cuts in their unlimited voice plans — first with their prepaid brands of the major carriers and then by #4 carrier T-Mobile. On Friday, the pressure on the two firms increased when both Verizon and AT&T cut unlimited voice service from $100 monthly to $70. This puts pressure on both carriers to justify why subscribers should pay $40-50/month for their smaller and less reliable networks.

Last summer, I predicted further commoditization, arguing that a Leap-Metro PC merger was long overdue:

The price wars in prepaid are only going to get more brutal, as MetroPCS and Leap both fuel the wars and respond to efforts by TracFone, Boost (Sprint), Virgin (Sprint) and GoPhone (ATT). Combining the two wouldn’t guarantee success, but it would expand and smooth their footprint while nearly doubling their respective scale for buying and other efficiencies.

Even if they combine their 11 million subscribers, building out a quasi-national network will take time: it took VoiceStream (now T-Mobile) more than a decade. As they build out their networks, the quality gap in voice will diminish, although the demand for a comparable 3G (and then LTE) footprint will only increase.

As smart phone prices companies will also need to add ever-cheaper smartphones as BlackBerry prices continue to fall and the two Korean CDMA manufacturers roll out more Android models.