Leap commits $900M over three years to Apple for iPhone

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Cricket provider Leap Wireless (NASDAQ:LEAP) said it committed $900 million over three years to sell Apple's (NASDAQ:AAPL) iPhone. However, the company, the first U.S. prepaid carrier to sell the iPhone, said it does not think the cost of the iPhone will have a major impact on its margins or capital expenditures in 2012.

Leap CEO Dough Hutcheson was upbeat about the iPhone coming to prepaid. "Loyalty is higher, and churn is lower with iPhone," he said. Leap will begin selling the iPhone 4S and iPhone 4 on June 22. The iPhone 4S will be available for $499.99 for the 16 GB model and the iPhone 4 will be available for $399.99 for the 8 GB model. The 16 GB iPhone 4S is often sold for $650 without a contract and the 8 GB iPhone 4 is often sold for $550 without a contract.

Leap will offer the iPhone with its $55 per-month, all-inclusive unlimited talk, text and data plan, though after customers hit 2.3 GB of data in a month they may have their data speeds throttled. The carrier plans to refresh its data plans later this year, including plans that customers can pair with the iPhone. "We will have new rate plans to provide consumers more choice," Hutcheson said, adding that unlimited data plans are not profitable or feasible in the long term. "We will evolve how we sell data."

Importantly, Leap will only sell the iPhone in markets where it uses PCS spectrum, since the device does not support its AWS spectrum. Those markets cover 70 percent of its total covered POPs, which amounts to around 60 million POPs across the country. Those markets exclude major cities including Boston, Chicago and New York, but customers can roam onto other networks. Leap in 2010 inked an MVNO deal with Sprint Nextel (NYSE:S) that allows Leap to sell its services nationwide.

Analysts were divided over whether consumers would take to the prepaid, unsubsidized model for an iPhone. "The math is reasonably compelling for a customer," Sanford C. Bernstein analyst Craig Moffett told Reuters. Moffett estimated that after about six months the higher up-front costs will be paid for because of Leap's cheaper $55 per month plan. On the other hand, JP Morgan analyst Phil Cusick said such expensive phones are "nearly irrelevant" to most prepaid customers.

Credit Suisse analyst Jonathan Chaplin wrote in a research note that the iPhone should help Leap, as long as the company can sell the required number of devices. "That said, the magnitude of the commitment adds risk and the device will likely pressure margins in the near-term (despite management comments to the contrary)," he wrote.

The deal Leap struck also brings back into focus Sprint's $15.5 billion, four-year commitment to sell the iPhone, wrote BTIG analyst Walter Piecyk. Sprint began selling the iPhone 4S and iPhone 4 last October. "Since that time over 10 smaller operators have added the iPhone into their product portfolio," he wrote. "Each of these operators could have also signed multi-year minimum commitments but the aggregate level of Sprint's commitment, which had already been questioned by investors, should come into greater focus as the differentiation of being one of the few operators to offer an iPhone quickly fades."

Piecyk wrote that while Leap's commitment "is certainly a bold commitment given that the market for customers willing to spending $400-$500 for iPhones in the United States is still unproven," it is still less aggressive than Sprint's deal with Apple.

Interestingly, the website TechnoBuffalo reported that Sprint will bring the iPhone to its Boost Mobile brand in early September; a Sprint spokesman declined to comment.

Indeed: "If Leap is successful, we would expect Sprint to launch the iPhone into their Boost and Virgin prepaid brands," Piecyk wrote.

For more:
- see this Dow Jones Newswires article (sub. req.)
- see this Reuters article
- see this BTIG blog post (reg. req.)
- see this TechnoBuffalo post

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