Sprint to abandon 2-year contracts by year-end, embrace leasing exclusively

Sprint (NYSE: S) CEO Marcelo Claure said the carrier is going to move entirely to a device leasing model by the end of the year and do away with two-year contracts. The shift is part of an ongoing move in the U.S. wireless industry away from two-year contracts and subsidized smartphones, which was a hallmark of the industry for years.

Claure, who disclosed Sprint's move in an interview with The Wall Street Journal, indicated that when Sprint does drop two-year contracts, leasing phones or paying full cost for the devices will be the only way to buy a new phone from Sprint. The carrier said that 51 percent of customers who purchased a new phone last quarter used its lease option, in which customers pay off their devices in monthly installments and then trade it in when the lease is done, similar to leasing a car.

Other carriers have embraced equipment installment plans (EIPs), led by T-Mobile US (NYSE:TMUS), which more than two years ago did away with contracts. Verizon Wireless (NYSE: VZ) and AT&T Mobility (NYSE:T) have eagerly embraced EIP programs, under which customers pay off their phones in monthly installments and can keep them or trade them in when they are finished paying them off.

Last week Verizon said that new customers would not be able to get two-year contracts and subsidized phones and would have to buy phones through its EIP program. AT&T still offers two-year contracts, but has indicated they will eventually go away, and has directed its third-party retail partners and dealers to sell its phones only through its Next EIP program. AT&T said that in the second quarter 68 percent of all customers buying postpaid smartphones chose AT&T Next.

"The $199, that is a thing of the past," Claure said in an interview on CNBC, referring to the cost of a smartphone customers would pay with a two-year contract. "The industry has changed. Consumers used to pay $199 for a phone, but they used to pay a much higher monthly fee. So I think one of the great things about the industry is we have unbundled it." 

Sprint just launched a new leasing program called "iPhone Forever" that lets new and upgrade-eligible Sprint customers get a 16 GB iPhone 6 for just $22 per month in device costs. Under the program, which lasts indefinitely, Sprint said anytime customers don't have "the latest" iPhone, they are eligible to upgrade. Customers can bring their iPhone, trade it in and upgrade on the spot, Sprint said. Customers need to purchase the device through the Sprint Lease program with $0 down at signing for $22 per month for a 21-month lease for qualified customers.

Sprint said that through Dec. 31, customers on any other carrier or existing Sprint customers who are upgrade-eligible and who turn in any smartphone will get a promotional rate of just $15 per month on a new iPhone. Sprint said it will pay off customers' old existing phone costs and contracts if they switch.

Sprint said new or existing customers who are upgrade-eligible can bring in any smartphone and get a 16 GB iPhone 6 and their monthly device payments will be just $15 until their next upgrade. As a special promotion, customers who get the iPhone 6 and then upgrade again before Dec. 31 will continue with the discounted price of $15 until their next upgrade. When customers next upgrade after that, the leasing price will return to $22 per month.

When Claure was asked by USA Today how important the new iPhone leasing program is  compared to other moves he has made at Sprint, on a scale of one-to-10, he said, "This is an 11.'"

Paying $22 per month over 12 months would equate to $264, or around 41 percent of the phone's $649 full retail cost. Customers can still buy iPhones and other smartphones outright if they want to keep them.

Claure said Sprint's partnership with its parent company, SoftBank, will help it monetize the traded-in phones, thus offsetting the phone's discounted cost. Sprint and SoftBank are setting up a leasing company that will finance its devices leased by customers on attractive terms.

Further, SoftBank is the majority owner of wireless device distributor Brightstar, which Claure founded. Working with Brightstar lets Sprint get access to more pre-owned devices and also sell refurbished phones to prepaid customers and other channels.  

Claure told CNET that Sprint will be able to effectively and profitably use the iPhones and other smartphones customers turn in as part of the leasing program. "Used phones and, the iPhone in particular, have tremendous appeal," Claure said. "We have a surprise in terms of what will happen to these used phones."

Claure also told CNET that the iPhone Forever program serves two purposes. It gives customers who want the latest technology as soon as possible a chance to get new iPhones while also creating a pool of devices Sprint can re-sell to customers who do not have the desire or means to get the latest iPhone.

"I don't know any other product besides the iPhone where people wait outside the store overnight," he said. "And it happens every year. Customers are dying to get their hands on the technology as it comes out. We are solving that pain point." Meanwhile, Sprint will have a device pipeline to serve "a different customer."

Claure told USA Today Sprint is planning to launch a new advertising campaign, and not just to promote the new iPhone leasing program. "The perception of the quality of our product is lower than the reality," he said. 

For more:
- see this WSJ article (sub. req.)
- see this CNBC article
- see this USA Today article
- see this CNET article  

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