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Leap to offer no-contract iPhone; commits $900M over 3 years

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Leap Wireless joined the growing number of regional operators offering Apple’s iconic iPhone device, though as has been the case for much of its history, the carrier is adding a unique twist: no contract required.

Leap, which operates its flat-rate, unlimited wireless offering under the Cricket brand, said it would begin selling a pair of iPhone models beginning June 22, sans contract. The carrier will offer the iPhone 4S model for $500 and the previous generation iPhone 4 for $400. To secure the device, Leap said it has committed $900 million over the next three years to purchase the devices from Apple.

The price is a substantial step up from the carrier’s current smartphone lineup that is dominated by Android-powered devices that top out at $150 after rebates. The carrier noted earlier this year it was set to bring on higher-end Android devices that would push retail prices to around $300.

While Leap has a history of not subsidizing or offering only a light subsidy on its devices, it appears the iPhone models will receive a bit more consideration. Wells Fargo Securities senior analyst Jennifer Fritzsche noted in a report this morning that the subsidy for each device will be in the range of $100 to $150. Leap looked to stymie concern noting that it expects the iPhone to account for around 10% of new device sales and upgrades over time.

The carrier will also require customers to select its $55 per-month plan that offers unlimited calling, messaging and data services with the device. If the iPhone proves popular that could help bolster average revenue per user, which was reported at $42.59 during the first quarter of the year.

Leap reported during the first period that strong sales of its Android-based smartphones had pushed the carrier’s cost per gross customer addition up nearly 19% year-over-year to $228. The expected increased costs associated with iPhone sales will place a premium on Leap managing to retain those iPhone customers for an extended period of time in order to recoup that investment. Leap reported 3.3% customer churn during the first quarter, which means the carrier had turnover of nearly 40% of its customer base on a yearly basis. The carrier also reported that the device will be locked to its network, preventing customers from moving the device to other CDMA-based carriers.

Leap reported during the first quarter that it cost $24.55 to serve each customer per month. Taking that amount out of the $42.59 it garnered in ARPU results in a profit of $18.04 per customer, per month. Factoring in the $228 it costs for the carrier to acquire customers across its current device portfolio shows that Leap will be relying quite heavily on the stickiness of the iPhone in order to make the move work financially.

Sales of the iPhone will initially be limited to Leap-owned markets where the carrier is currently using its 1.9 GHz spectrum band to provide 3G services. The carrier said those markets cover approximately 60 million potential customers, or roughly two-thirds of its total network. The other one-third of its markets rely on the carrier’s 1.7/2.1 GHz spectrum holdings to offer 3G, spectrum bands that are not supported by the current version of the iPhone. That lack of compatibility could change with the next iteration of the device as T-Mobile USA, which is the only nationwide operator not currently offering the iPhone, has hinted that it could begin offering the device soon, a move that would require support for the 1.7/2.1 GHz spectrum bands the carrier uses for its current UMTS/HSPA-based 3G network.

Customers that do purchase the device will be able to roam outside of their native coverage through an agreement Leap has with Sprint Nextel. Leap did note that its unlimited data offering is subject to its “fair use” policy for any usage beyond 2.3 gigabytes. The carrier currently throttles data speeds for smartphone customers after 1 GB of data transmission. The larger amount of unlimited data for the iPhone seems to compare well against larger rivals like Verizon Wireless and AT&T Mobility, which limit customers to 2 GB of unlimited data before overage charges apply.

Leap also said it does not expect to increase current capital expenditures to meet any potential increased network demand for the device. The carrier previously announced plans to spend up to $650 million on capex this year, with $146.3 million having already been spent during the first quarter. Leap is also in the process of expanding its LTE coverage footprint to approximately 25 million potential customers by the end of the year. The emphasis on that expansion could increase if as expected the next version of the iPhone includes LTE support in the spectrum bands Leap is using for its LTE service.

There was also no word yet from rival MetroPCS regarding its potential in offering the iPhone to its customers. Like Leap, MetroPCS focuses on flat-rate, unlimited calling plans. The carrier’s iPhone future could be hindered by rumors of a potential deal with a larger rival, as the carrier’s operations continue to be pressured by the competitive nature of the business.

Leap’s stock (LEAP) was trading down nearly 3% early Thursday.

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