Leap Wireless LEAP announced Thursday that it plans to add Apple’s AAPL iPhone to its product portfolio starting June 22. Leap will be the first prepaid carrier to offer the device in the United States, and its service plan price point will be $55 per month, which will include unlimited voice, text, and data. As for the hardware itself, Leap plans to offer the iPhone 4 (8 GB) at $400.00, and the 4S (16 GB) for $100 more–roughly a 25% discount to its peers.
Initially, Leap will make the device available in nearly 60 markets, covering nearly 60 million of its covered points of presence (POPs) and more than 70% of its current subscriber base. The firm agreed to a three-year purchase commitment with Apple, which translates into a cost of roughly $900 million for a device that will represent less than 10% of its mix. Assuming the device cost to Leap is in the range of $500-$600, the firm is on the hook for just over 1.6 million handsets.
As we’ve seen from other carriers, the iPhone launch will be a compromise between sacrificing near-term margins for long-term improvements in subscriber growth, average revenue per user, and churn. That said, management insists the launch won’t have a material impact on its 2012 operating income before depreciation and amortization. This could be true from a subsidy perspective. We estimate the average subsidy Leap will pay for the iPhone is in the range of $100-$150, which is right in line with the TTM reported equipment subsidy per gross addition ($120).
There are still, however, plenty of questions that need to be answered. First and foremost, it is unclear whether the firm’s credit-challenged customer base will be able to digest a handset cost that is twice as high as its current devices. Furthermore, the firm wouldn’t disclose specifics about the future availability of the upcoming iPhone 5 and other new devices. Lastly, the network coverage issues present a potential impediment to sales. Less than two thirds of the firm’s POPs will be covered by the launch because the device only operates on a portion of the frequency bands in its markets. Thus, while the news is sure to generate buzz and potentially spark more consolidation discussions, we aren’t yet ready to buy in to the concept that this represents a giant leap forward.
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