The iPhone 5 may have hogged most of the attention since its
launch last week and seen the most launch-day pre-order interest of
any iPhone as well, but two of Apple's (
AAPL
) U.S. carrier partners will be excited for a completely different
reason.
When Apple launched the iPhone 5 last week, it also slashed the
prices of its older models, making the iPhone 4 free with a
two-year contract. That, in itself, may not very interesting
considering that this isn't Apple's first free subsidized offering
- the iPhone 3GS was also available for free. But the 3GS'
inability to work on CDMA meant Verizon (
VZ
) and Sprint (
S
) had to live without a free iPhone for a year, while AT&T (
T
) got a free ride. This will change however with the free iPhone 4,
which incidentally was the first Apple built with
CDMA-support. It makes both the CDMA-players, Verizon and
Sprint, eligible to carry a free iPhone for the first
time.
Of the two, however, this probably means the most to Sprint, not
only for the fact that it breaks AT&T's exclusive
hold on the only remaining iPhone bastion but also because it makes
it easier for Sprint to meet its highly expensive commitment to
Apple made late last year.
See our complete analysis for Sprint
iPhone strategy paying off
Sprint's decision to carry the iPhone last year came as a
solution to its continued postpaid subscriber loss problem as the
company believed that the iPhone will help attract more number of
subscribers to its core CDMA platform and mitigate the loss of
subscribers on the iDEN platform. However, since Sprint
was a tad late in jumping on the iPhone bandwagon, it had to make a
huge upfront commitment of nearly $15.5 billion to Apple over a
four-year period. This was a massive bet considering that the
company had a highly leveraged balance sheet with about
$26 billion in debt
on its books compared to what was its market capitalization of only
around $7.5 billion then.
However, with the company reporting three strong quarters
of postpaid net adds on its core Sprint network since the iPhone
addition, we believe the bet is working out for Sprint. Sprint
added a net 442,000 subscribers to the Sprint platform last
quarter, almost twice as many as it did in the year-ago quarter and
70% higher sequentially. While this figure was boosted by the
number of iDen subscribers Sprint was able to migrate to its core
CDMA network, it also came in a highly saturated market that is
causing behemoths Verizon and AT&T to add fewer postpaid
subscribers this year.
iPhone 4 to help in meeting commitment
The carrier has sold 4.8 million iPhones so far in the first
three quarters since the iPhone made its debut at Sprint. If Sprint
is able to maintain this rate for the next four years and sells an
average of a little more than 6 million iPhones every year, it will
only just be able to meet its $15.5 billion minimum commitment
at a cost of about $630/iPhone (accounting for all the cheap
iPhones it sells and using Apple's iPhone ASP for 2011). Of course,
Sprint has only just started out with the iPhone and it could sell
more than 6 million iPhones every year. But having a free iPhone,
no matter how many generations old, will surely help
Sprint get a few more iPhones out of the door and make the
target more comfortable to achieve.
Apple doesn't give out its iPhone sales mix, so it is tough to
get a clearer picture of how many iPhone 4 units Sprint could sell
going forward. But Apple CEO Tim Cook has indicated in the past
that the lower price points have had a significant role to play in
the company's iPhone success. While discussing Apple's Q2 FY2012
earnings, when Apple managed to sell about 35 million iPhone units,
Tim Cook had this to say:
On the iPhone, we continue to be very happy with the moves
that we made in pricing just a few months ago on the iPhone 3GS
and the iPhone 4. And both of them contributed to our
ability to achieve 35 million in sales, which is our second
highest quarter of all time.
Margin pressures offset by ARPU gains
Selling the cheaper iPhones will however not decrease
Sprint's subsidy burden. The iPhone 4 may be free for the end
buyer but Sprint will still have to pay Apple about $450 on each
iPhone sold, the same as it will for the iPhone 5 and the 4S.
However, since iPhone buyers are generally heavy data users, most
of them would choose its unlimited data plans which start at a
minimum cost of $80 per month and go on up to $110 per month.
Sprint's current postpaid ARPU (for the Sprint network) stands at
$61, as of last quarter; so there is a significant room to drive
postpaid ARPUs up by increasing adoption of unlimited plans through
iPhone sales. This would help Sprint more than make up for the
upfront subsidy cost by locking in the user for the term of the
contract period, i.e, 2 years.
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