Leap Wireless International Inc LEAP.O will be the first U.S. provider of prepaid mobile services to sell the Apple Inc (AAPL.O) iPhone, potentially putting pressure on its much bigger rivals to provide cheaper phone or service prices.
The regional operator, which caters to cost-conscious customers who pay phone bills in advance, is joining its much bigger national rivals Verizon Wireless, AT&T Inc (T.N) and Sprint Nextel Corp (S.N) in selling the popular device.
While Leap's iPhone price will be two and a half times higher than its bigger rivals, which give discounts to customers who sign two-year contracts, Leap customers will pay smaller monthly service fees and will not need to sign contracts.
If Leap's customers can get over the high device price, the hope is that they will stick with its service for longer and the offering may even make bigger rivals reconsider their efforts to pull back on phone discounts, also helping Apple, analysts said.
"The math is reasonably compelling for a customer," said Bernstein analyst Craig Moffett who estimated that after about six months the higher purchase price will have paid for itself because of Leap's cheaper $55 a month service fee.
In comparison, Verizon Wireless' lowest monthly fee for iPhone would be $70 while AT&T's would be $60 and both plans allow less mobile data usage than Leap. On top of the higher service prices these operators have also been looking to cut their costs on phone upgrades, which have been swollen by the hefty iPhone subsidies that they pay Apple.
So if iPhone is a success for Leap, "it puts more pressure on Verizon and AT&T to maintain high subsidies" Moffett said.
Leap said it will sell the 16-gigabyte iPhone 4S for $499.99, compared with its rivals' $199.99 price tag. Leap will also sell the older 8-gigabyte iPhone 4 model for $399.99.
BTIG analyst Walt Piecyk said that even if Leap does not make a big dent in its rivals numbers, they may end up reviewing their policies.
"If they can deliver a couple of hundred thousand every quarter the other operators might say that's something we'd have to look at," he said. "It's an interesting test case to see if consumers are willing to spend $400 or $500 on a phone for a cheaper rate plan," he said.
Both Verizon Wireless and AT&T declined to comment for the story.
The offering may also hurt rivals Sprint and T-Mobile USA, which also target cost-conscious consumers.
The No. 4 U.S. mobile operator, T-Mobile USA, which competes with Leap for cost-conscious customers, is the only national network operator that does not sell the iPhone.
$900 MLN COMMITMENT
Leap said on Thursday that its contract with Apple would cost it an estimated $900 million over three years as it expects its minimum purchase commitment to represent less than 10 percent of projected total handset sales.
This is much lower than the $15.5 billion that Sprint Nextel committed to pay Apple over a four-year period. Leap said it does not expect iPhone sales to have a significant impact on its operating income. But even so some analysts worried that a successful iPhone launch would hurt Leap's profitability.
Wells Fargo analyst Jennifer Fritzsche said that while the device should help Leap's customer growth, it may hurt profits.
"Our initial concern is this could hit margins as we expect these users to roam more and use more data," Fritzsche said in a research note.
T-Mobile USA is a unit of Deutsche Telekom AG (DTEGn.DE). Verizon Wireless is a venture of Verizon Communications Inc (VZ.N) and Vodafone Group Plc (VOD.L).
Leap shares were unchanged at $5.77 at market close on Thursday after rising as high as $6.14 during the Nasdaq session.
(Reporting By Sinead Carew; Editing by Gerald E. McCormick, John Wallace and M.D. Golan)