Cricket iPhone Launch Poses Serious Subsidy Questions
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Leap Wireless-owned Cricket’s plan to offer the iPhone later this month isn’t being welcomed by financial analysts as a huge win for the prepaid carrier.
Cricket isn’t heavily subsidizing the smartphone, leaving some analysts to wonder whether customers will shy away from Apple’s device due to the hefty price.
“Should customers balk at the highest priced product in Leap’s portfolio, the company will likely be forced to offer greater [subsidies] and pressure margins,” Canaccord Genuity analysts Greg Miller and Eric Chu wrote in a daily letter to investors.
The iPhone 4S will be sold for $500 for the 16GB model and the iPhone 4 will be available for $400. By comparison, the average new handset sold at Leap costs a modest $32 while the highest-priced smartphone is $100, according to Canaccord Genuity, citing company data.
Miller and Chu said Leap has a three-year, $900 million commitment to Apple that poses risks.
“If LEAP fails to achieve that target, the carriers would either be liable for some form of penalties, or be forced to increase subsidies in order to push higher unit sales,” the analysts wrote. “Either outcome would put additional strains on its wireless margins, which have already come under pressure.”
Deutsche Bank Securities viewed Leap’s plans as only modestly positive. The estimated subsidy shouldn’t significantly pressure EBITDA and its “purchase commitment with Apple is manageable,” the firm said. The iPhone also could help Leap expand its market by attracting customers who were on contract, according to Deutsche Bank Securities.
“That being said, the device’s high price point and limited distribution suggest that this isn’t a game-changer for LEAP, and we are leaving our estimates unchanged,” Deutsche Bank Securities asserted in a research note. “While LEAP has attractive upside potential, we maintain Hold due to increasing competitive pressures in prepaid, high execution risk and limited pot’l upside catalysts in the seasonally slow 2Q/3Q.”
Cricket is the first U.S. prepaid carrier to offer the iPhone to its customers. Customers with the $55-per-month unlimited talk, text and data plan can get the iPhone 4S or the iPhone 4 starting June 22.
