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Leap to Spin Off Muve Music

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Prepaid carrier Leap Wireless International Inc. plans to gain from the success of its popular Muve Music subscription by spinning it into a separate entity and licensing the music platform to other telecom carriers around the world.

Muve Music service, which was originally launched in Jan 2011, allows Leap Wireless customers to download unlimited songs, ringtones and ringback tones at an additional cost of $10 per month. On an average, subscribers download more than 100 songs and listen to 20 hours of music per month.

According to LeapWireless, a standalone entity will make Muve Music attractive to other operators as they will not have to license it from a rival carrier. Leap already has signed agreement with an international carrier but has not disclosed the name of it yet.

Moreover, the spin-off unit will offer music distribution, discoverability and a licensing platform as a managed service, thereby allowing the telecom company to establish their own brands and rates. Telecom carriers can also offer the service as a value added one to the customers. However, it isn’t clear whether the company will be listed on the stock exchange or not.

Of late, the prepaid carrier has been subject to massive subscriber losses based on high unemployment rate. The company has undertaken a major restructuring effort to turnaround its business. Nevertheless, the attempt hasn’t yielded any meaningful result as the company lost a net total of 337,035 customers in the fourth quarter of 2012.

Currently, Muve Music is the only bright spot left in Leap Wireless’ business, which offers its service under the Cricket brand. Muve Music managed to add more than 1.1 million Muve Music subscribers by 2012-end from only 600,000 customers in Aug 2012. The impressive showing was primarily attributed to Cricket’s strategy to include Muve Music service in all its smartphone plans.

More people are now using their smartphones to download songs and videos. Going forward, this pattern is expected to continue as smartphone penetration is only expected to increase. We believe this is a good move by Leap Wireless, which will not only popularize its Muve Music, but will also establish it as a significant music streaming company.

On the flip side, the pay-as-you-go carrier will lose its identity as the sole provider of its popular Muve Music service. Reportedly, search giant Google Inc. is currently negotiating with music companies to start a similar subscription-based music service.

Pandora Media Inc. (P - Free Report) also has a popular custom radio service and Apple Inc. (AAPL - Free Report) is also working on offering similar music service to its customers, which could act as a threat for Muve Music in the future.

Currently, Leap carries a Zacks Rank #3 (Hold).

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