Cricket Offers First Contract-Free iPhones

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Cricket, the discount prepaid mobile subsidiary of Leap Wireless (NASDAQ: LEAP), is set to become the first carrier to offer a prepaid Apple (NASDAQ: AAPL) iPhone, with the devices becoming available this month. The phones will be a game changer as the low price, no contract plans change how the device subsidies are handled, compared to the big three iPhone retailers of AT&T (NYSE: T), Sprint (NYSE: S), and Verizon (NYSE: VZ). The offering could increase iPhone market share but also runs the risk of eroding the exclusive image of the brand.

Cricket will offer a 16GB iPhone 4S for $499.99 and an iPhone 4 for $399.99. A monthly plan will cost $55 for unlimited voice and texting with a data plan that’s called unlimited but is technically capped at 2.3GB. The device prices are lower than the unlocked models but do come with some limits, such as the lack of a mobile hot spot and tethering options.

For comparison, AT&T offers the 16GB iPhone 4S for $199.99 with a two-year contract. Unlimited calling plans are $69.99 plus $20.00 for unlimited texting and $30.00 for 3GB of data. That adds up to a monthly bill of about $120 a month, over the course of a two-year plan, for a total contract price of around $2900. Add that to the device price for a rounded total of $3100. The Cricket phone, over a similar time frame, will total out to about $1820. This price difference could make the Cricket deal very enticing for consumers.

The price difference won’t make the competing carriers as happy, due to pricing strategies that aren’t very adaptable due to the high subsidies. Subsidies are payments carriers make to the device manufacturer, essentially for the “honor” of getting to stock that device. Apple isn’t alone in charging a subsidy, but its charges are far higher than its competitors. Analysts estimate that carriers pay out $400 for every iPhone sold.

There are different ways this subsidy can be offset by the carrier. The Cricket offer places most of the offset in the upfront device price. The big three carriers stay competitive with each other by offering discounted devices with attached multiyear contracts that feature rate hiked calling plans that cover the subsidies.

The big three have shown signs of wanting to change subsidy methods but it’s speculated that the current carrier agreements between the big three and Apple have up to another two years before coming to an end.

Margin of Error

Leap shares were down over 12% to $5.06 on this past Friday due to investor concerns regarding margins. The iPhone deal will cost the company $900 million over the next three years. If Cricket isn’t able to move a sufficient volume of devices, it will take a sharp hit to the margins. But high volume is necessary for all of the iPhone carriers.  If the Cricket deal becomes popular, there’s not much that the contracted phone plans can immediately do to seem more competitive.

Sprint stands in position to best counter the Cricket offering as its Boost Mobile subsidiary is rumored to be the next company to offer prepaid iPhones, with its devices possibly coming in September.


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