Leap Wireless International Inc.
) has announced to sell
) iPhone, which will make it the first prepaid telecom carrier in
the U.S. to offer the popular device. We believe that this new
offering will put additional pressure on large carriers like
Verizon Communication Inc
), which sell postpaid iPhone services.
Leap sells its mobile services under the Cricket brand and will
offer iPhone 4S at $499.99 and iPhone 4 at $399.99, charging $55
per month for unlimited calls, messaging and data. As a part of the
agreement, Leap wireless will pay Apple an estimated amount of $900
million over a period of 3 years and expects iPhone to constitute
10% of its total handset sales.
Leap wireless will initially charge a high price for the device
which is almost 2.5 times more than what is offered under the post
paid plans. However, the benefit of the prepaid plan over postpaid
is that the customers do not have to sign a contract nor is there
any data usage cap.
It is calculated that based on the $55 per month plan, the
difference in the prices of between postpaid and prepaid devices
can be recovered in just six months. We believe that if the
customers can initially take the burden of this higher price they
will be benefitted in the long run based on its low tariff
The launch of this service will give iPhone customers nationwide
network coverage and a low-cost value plan. Based on this, the
company will particularly try to lure the low-end customers of
national carriers who prefer lower monthly cash outflow.
However, the downside of this deal is that Leap wireless will
have to shelve out higher subsidies for iPhone than other
smartphones and the unlimited nature of the plan will lead to
higher data usage, thus impacting its bottomline. Nevertheless, we
are optimistic that if the company can properly manage the device
price offering they could at least pressurize the bigger carriers
to revise their plans.
Recommendation: We are maintaining our long-term Neutral
recommendation on Leap Wireless international. Currently, Leap
Wireless International has a Zacks #3 Rank, implying a short-term
hold rating on the stock.
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