Sprint to Offer Prepaid iPhone on Cheaper Data Plans
06/07/2012| 03:23pm US/Eastern
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--Sprint confirms plans to offer prepaid iPhone through Virgin Mobile unit
--Phone available June 29 with no subsidy but cheaper data plans
--Opens new sales route to meet volume commitment with Apple
(Adds AT&T background, analyst comment and updates stock price.)
By Thomas Gryta
Sprint Nextel Corp (>> Sprint Nextel Corporation), in unveiling its plans to offer the Apple Inc. (>> Apple Inc.) iPhone through one of its pay-as-you-go businesses, announced a pricing structure that may change how users buy and pay to use the popular smartphone.
Beginning June 29, Sprint's Virgin Mobile USA unit will sell a 16-gigabyte version of the latest iPhone for $649, the same price as in Apple's stores, but will offer unlimited data plans--without the consumer needing to agree to a two-year contract--at nearly one-third the price of plans from rival postpaid carriers.
The move gives Sprint, based in Overland Park, Kan., another way to sell the popular device in order to meet a $15.5 billion, four-year purchase commitment to Apple. It also begins a nationwide experiment to see if customers are willing to pay a large upfront price for a sophisticated phone in exchange for lower monthly service costs.
Major postpaid carriers like AT&T Inc. (>> AT&T Inc.) and Verizon Wireless offer the iPhone for hundreds of dollars less than its retail price but make up the money--and then some--by locking the customer into two-year data plans. The carriers have been looking for ways to end or reduce the subsidies they pay smartphone makers.
Last week, Leap Wireless International Inc. (>> Leap Wireless International, Inc.) said it would start selling the device with prepaid service on its Cricket Wireless network, but that would only make it available to about 20% of Americans. The Virgin iPhone will be available nationwide at RadioShack Corp (>> RadioShack Corporation), Best Buy Co. Inc. (>> Best Buy Co., Inc.) and online.
"While we still question how many of these customers will be able to afford the device at the point of sale, we believe Sprint has structured the price points of this plan in a way which significantly reduces the risk" of material margin degradation, Wells Fargo analyst Jennifer Fritzsche said in a note to clients. "We see this trade-off as a very good thing."
Sprint said offering the Virgin iPhone shouldn't impact its 2012 adjusted cash flow. Shares of Sprint were recently up 4 cents, or 1.5%, to $2.76. Leap fell 2 cents, or 0.5%, to $5.12, while Apple was up $3.87, or 0.7%, to $575.33.
Virgin Mobile's 16-gigabyte iPhone 4S will be about $450 more than the major carriers when signing a contract, and $150 more than the same models from Leap. Virgin will offer the older 8-gigabyte iPhone 4 at $549.
Virgin Mobile has prepaid plans that begin at $35 a month, including unlimited data and messaging with 300 minutes for phone calls. Data speeds will be throttled after the user consumes 2.5 gigabytes a month. An unlimited voice plan is available for $50 a month. The company offers a $5 a month discount to users that register for automatic monthly payments.
Customers can also pay an additional $15 a month to use their iPhone as a mobile hot spot.
In comparison, Leap is charging $55 for unlimited talk, text and data, with a similar limit on full-speed data. Plans with other wireless carriers are frequently $100 or more, and users are locked into two-year contracts.
Sprint offers a postpaid plan--which locks in the customer for two years and includes a subsidy for the phone--for $79.99 a month and includes unlimited data and messaging with 450 minutes of talk time. Sprint has said its postpaid plans don't throttle on data usage.
The potential $50 monthly cost savings from using the Virgin phone would pay for the extra $450 cost of the device in just nine months.
The addition of a prepaid iPhone allows Sprint to sell the device to a new type of customer. This widening of the potential market should help satisfy the commitment to Apple, which also benefits by getting its brand into new hands. Aside from having no contract or activation fees, there are no credit checks for prepaid customers.
Sprint began offering the iPhone in October and has sold 3.3 million units over the past two quarters.
Sprint's pay-as-you-go brands, which include Boost Mobile, have been a source of growth as contract customers have moved on. Sprint added 489,000 prepay customers in the first quarter and lost 192,000 contract customers, which are considered more profitable.
AT&T CEO Randall Stephenson warned last week at a Sanford Bernstein conference that phone buyers seem to be very sensitive to increases in the initial cost of the iPhone.
"I think the whole industry is going to watch, I think it's an interesting model," he said.
If the model produces consumer demand, Stephenson said that AT&T would consider offering its own prepaid iPhone.
Piper Jaffray's Chris Larson expects the other major carriers are likely to follow suit in offering prepaid iPhones. He would be surprised if a million prepaid iPhones, from all carriers, are sold in the last six months of the year because consumers are unwilling to stomach the high upfront costs of paying for the prepaid iPhone.
"They would rather pay Tuesday for a hamburger today," Mr. Larson said.
-Write to Thomas Gryta at thomas.gryta@dowjones.com
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