Apple’s (NASDAQ:AAPL) iPhone is slowly spreading its tentacles into the prepaid market after proliferating through the post-paid market. Sprint‘s (NYSE:S) pay-as-you-go Virgin Mobile brand is planning to offer the iPhone without a contract as soon as July 1st, according to the Wall Street Journal’s sources.  If the report is true, the carrier will become the second wireless operator following Leap Wireless to offer the popular smartphone with a prepaid service. While the pricing details are yet unknown, if the Leap deal is any indicator, Sprint will be offering lower subsidies on the iPhone with a less expensive prepaid plan.
Offering the iPhone to its prepaid subscribers will help Sprint expand its user base and meet its expensive commitment to Apple made late last year. Moreover, owing to the more widespread coverage of its network as compared to Leap’s, Sprint will be able to attract more prepaid customers to make the switch to the iPhone on its network. We have a price estimate of $3.75 for Sprint, about 50% ahead of the current market price.
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Prepaid iPhone decreases risk of not meeting Apple commitment
Sprint’s decision to carry the iPhone 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 has a highly leveraged balance sheet with about $26 billion in debt on its books compared to a market capitalization of only around $7.5 billion.
However, with the company reporting two 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 263,000 subscribers to the Sprint platform last quarter, below the previous quarter’s 539,000 but a tad more than net adds posted a year ago. This came even as an increasingly saturated wireless market caused behemoths Verizon and AT&T to add fewer postpaid subscribers this quarter. (see Sprint’s iPhone Bet Is Starting To Pay Off, $3.75 Fair Value)
The carrier has sold 3.3 million iPhones so far in the first two 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 6 million iPhones every year, it will only just be able to meet its $15.5 billion minimum commitment at a cost of $649/iPhone. Of course, Sprint has only just started out with the iPhone and it could sell more than 6 million iPhones every year. But if it comes out with a prepaid iPhone and manages to get a few more iPhones out of the door, the target will become more comfortable for Sprint to achieve.
To get an idea of how many Sprint will be looking to sell, Leap, which has about 6.2 million prepaid subscribers, has committed to Apple to buy at least $900 million worth of iPhones over a three-year period. That translates to around 460k iPhones every year. Sprint, with more than twice as many prepaid subscribers on its core platform, will be looking to sell about double as many every year.
Margin pressures to be alleviated
Selling a prepaid iPhone will put lesser subsidy burden on the carrier. Sprint’s prepaid iPhone offering will likely be priced higher than its postpaid counterpart as the phone will come without a contract. However, subscribers will pay much lesser every month for the prepaid plan as compared to the expensive postpaid ones. For example, the Virgin Mobile unlimited plan costs about $55 per month while Sprint’s unlimited postpaid Simply Everything plan can set you back by double that amount every month.
While the ARPU levels may be lower for Sprint than postpaid, customers buying the iPhone will most likely go for the unlimited plan which will drive prepaid ARPUs up. Higher adoption of its $55 per month unlimited prepaid plan will bring in almost twice as much revenues per subscriber as its current average $28.