Leap with iPhone: Coming Soon
Rajesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Leap Wireless (NASDAQ: LEAP) will begin offering Apple’s (NASDAQ: AAPL) iPhone starting from June 22 under its Cricket Communication division. The company is to become the first US prepaid carrier to make such a popular offering. The iPhone 4S and iPhone 4 wireless plan will cost consumers $55 a month which includes unlimited usage of data, calling and texting, though the data speed will be throttled once 2.3 gigabytes a month is consumed.
The deal
Leap has been investing heavily to secure the deal with Apple. The company entered into a three year deal with the iPhone maker as per which it shall buy bulks of iPhone models over the contract period, roughly costing $900 million. The prepaid carrier proposes to offer new devices and data plans in the months to come.
Neck to neck with the biggies
The pay-as-you-go service provider is entering into the league of the big players such as Verizon (NYSE: VZ), AT&T (NYSE: T) and Sprint (NYSE: S) in offering the iPhone. T-Mobile, which competes with Leap for the cost conscious consumer segment, is the only national carrier that does not deal in this popular device.
Let’s take a closer look into the prices charged by Leap and its competitors.
Leap’s $55 plan is reasonably lower than Verizon’s $70 a month and AT&T’s $60, and both the plans allow lesser data usage. However, the upfront cost of buying both the models from Leap comes to 2 ½ times higher than its competitors. Leap, under its Cricket brand, is providing the 16-gigabyte iPhone 4S for $499.99 and the older 8-gigabyte iPhone 4 model for $399.99. In contrast, AT&T charges $99 for iPhone 4 and both Verizon and AT&T offer iPhone 4S at $199. However, the discount is not given for free. In exchange for the subsidized price, the biggies require the customers to enter into a two year contract with them, unlike Leap which demands no fixed term contract. This is their indirect way of covering the phone cost.
Food for thought
Clearly, the regional carrier is charging a much higher price than its rivals. It should not be ignored that Leap targets customers in the value segment who look for affordable offers to keep their expenses in check. Such expensive devices might be inappropriate for prepaid customers who generally do not prefer to shell out high amounts from their pockets in one go. In case they brood over the onetime cost, they might withdraw from Leap’s iPhone and rather prefer competitors’ offer at a lower rate.
In fact, Leap too does not expect the iPhone sales to have a notable impact on its operating profit. Even if the iPhone launch becomes a hit, it might squeeze profitability margins as analysts believe that users will roam more and use data heavily.
But there’s a bright side too.
First, Leap is providing the iPhone on a prepaid and no long term contract basis, while fellow players offer the same at $650 in case the customer does not desire to enter into a contract. This could be a decisive point for a prospective buyer.
Second, the iPhone attraction could increase traffic in the Cricket stores which might result into customers opting for other low priced devices if not the iPhone. Also Leap, which experienced a slowdown in its customer growth in the first quarter of the year, may witness revival. The third quarter is expected to have higher traffic than usual driving better revenue.
My takeaway
Launching iPhone is a big leap for the regional carrier. The company has been strategizing to introduce more devices in the near future along with attractive data plans for the iPhone. If Leap’s customers get over the initial cost of acquiring the device, there are high chances that they will bond with its services for the long term. This will force the leading players to reconsider their strategy to fight the new prepaid entrant. And surely, Leap won’t mind disturbing the industry leads.
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