Unsubsidized iPhones not appealing to consumers
Leap Wireless (NASDAQ:LEAP) is realizing that unsubsidized Apple (NASDAQ:AAPL) iPhone devices are not hot-sellers with consumers. Without carrier subsidies to reduce the price, the latest iPhone model sells for $500 or more, and that price point is too difficult for Leap's cost-conscious consumers to justify.
Cricket provider Leap Wireless reported yesterday that it would probably only sell half as many iPhones as it planned during the first year of its contract with Apple. If iPhone sales do not pick up, Leap said it could be forced to buy $100 million of unsold iPhones this summer.
Last June Leap committed $900 million over three years to sell Apple's iPhone. The company was the first U.S. prepaid carrier to sell the iPhone and at that time said it did not think the cost of the iPhone would have a major impact on its margins or capital expenditures in 2012.
Leap sells the 16 GB iPhone 5 for $499, and its monthly service costs $55 for unlimited talk, text and 2.5 GB of high-speed data. Leap argues that its prices result in lower overall costs for customers since its monthly iPhone charges are far less than what postpaid carriers like AT&T Mobility and Verizon Wireless typically charge. However, that mathematical argument--higher initial costs but a lower lifetime expense--appears to have fallen flat with Leap's customers.
Leap has about 5.3 million customers and lacks a nationwide network, but in 2010 Leap inked a wholesale 3G MVNO agreement with Sprint Nextel (NYSE:S) in order to offer Cricket-branded services nationwide. Leap also recently said it has entered into an LTE roaming deal with an unnamed company, likely Sprint.
Leap declined to say how many iPhones it has sold since it entered into a deal with Apple. However, a Leap spokesperson told the Wall Street Journal that iPhone sales have been running higher than 2 percent of phones sold in markets where the company sells the device.
Leap only sells 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's disclosure about its iPhone sales also casts a shadow over other carriers currently selling the iPhone through a prepaid model. Sprint's Virgin Mobile, TracFone Wireless' Straight Talk and others offer the iPhone coupled with prepaid service.
Prepaid iPhones are slightly more common in other, international markets, where customers are more acclimated to paying more for their phones upfront in order to receive less expensive monthly service plans.
Apple is rumored to be creating a cheaper version of its popular device, which may appeal to cost-conscious subscribers. Earlier this year it was rumored to be creating a less expensive device that will be made from plastic and will have the iPhone 5's Retina display and Lightning dock connector.
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