Leap Wireless International Inc. (LEAP) has announced to sell Apple Inc’s (AAPL) 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 (VZ), AT&T Inc (T) and Sprint-Nextel Corp (S), 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 offerings.
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.Read the Full Research Report on AAPL
More From Zacks.com