Why The $1 A Month iPhone 6S Offer Could Be Great For Sprint

The fall iPhone update cycle sees a flurry of promotional activity in the wireless industry, as carriers look to lure customers away from competitors. This time around, Sprint (NYSE:S) appears to have upped the ante, offering a limited time promotion, under which new and existing customers can lease a 16 GB iPhone 6S for just $1 per month or an iPhone 6S Plus for $5 a month, if they trade in an iPhone 6. An annual upgrade option will also be included under the program. ^[1] While the deal has been garnering a lot of headlines, helping the carrier create some buzz ahead of the crucial Friday launch of the new handset, it could also turn out to be quite lucrative for Sprint. Below we take a look at the potential financial implications of the program and how it could benefit Sprint.

We have a price estimate of $4.50 for Sprint, which is roughly in line with the current market price.

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The Offer Should Be Cost Effective 

A back of the envelope calculation shows that the offer won’t really cost Sprint much, since it is effectively leasing a new iPhone while also requiring customers to trade in a relatively valuable iPhone 6 in the process. Although there are many possible scenarios and device combinations, for simplicity, consider a customer with a 16GB iPhone 6 who wants to upgrade to a 16GB iPhone 6S. Let’s also assume that the customer holds on the device for the full 21 months of the lease agreement and chooses to buy it at the end of the period. Now, the base model of the 6S would cost Sprint $649 and we estimate than the used iPhone 6 that a customer trades in could be worth around  $375 to Sprint (third party trade-in services pay about $350), assuming it’s in decent shape. That would bring the effective cost of the 6S down to $275 for Sprint. Now at the end of the 21 month period, Sprint would have collected $21 in device leasing fees as well as a $187 fee it would charge customers to own the device. This would bring the net cost of the promotion under this scenario to just about $67 per device, excluding interest costs.

The Benefits Of A Larger Mix Of iPhone Customers Will Be Significant

Now, the benefits of the plan could be manifold for Sprint. Firstly, iPhone customers are generally thought to be more affluent, on average, compared to Android users and this should bode well for the overall credit quality of Sprint’s customer base. According to a report from comScore issued in August 2014, iPhone users had a median income that was as much as 40% higher compared to Android users. ((iPhone Users Earn Higher Income, Engage More on Apps than Android Users, ComScore, August 2014)) Secondly, iPhone users are also more engaged with their smartphones on average, and their mobile data consumption is typically higher than other smartphone users. This could be particularly lucrative for Sprint, since mobile data is the biggest earnings and valuation driver for the company. Thirdly, the above plan could help to contain churn rates and improve loyalty, as customers may benefit from sticking with Sprint when they upgrade their devices. Finally, there are also specific benefits of having the iPhone 6S on Sprint, since the device supports the “carrier-aggregation” technology that Sprint has started rolling out in select cities. The technology, which sends data over two or more wireless channels at the same time, allows for speeds that are two to three times faster than traditional LTE. This should allow for more efficient spectrum use, higher throughput and higher data billings for Sprint.

With all this said, it still remains to be seen how successful this plan will turn out to be, as there may not be a particularly large base of wireless customers in the U.S. who have already paid off installments for an iPhone 6 or own the devices outright. Moreover, many of those customers are likely on carriers such as Verizon (NYSE:VZ) and AT&T (NYSE:T) that typically offer ownership plans rather than device leases. It could be harder for Sprint to take customers away from the big-two carriers given their current network advantages.

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1. Sprint aims to undercut T-Mobile with $1-per-month iPhone deal, CNET, September 2015 [↩]