Leap Wireless (LEAP) Takes an Expensive Leap by Selling Apple's (AAPL) iPhone
Leap was once considered one of the strongest growth stocks in the market, trading at $95 per share in July 2007. Since then, Leap has been besieged by low-cost competitors. The increasing dominance of AT&T (T: Charts, News) and Verizon (VZ: Charts, News) has also marginalized the company's presence.
Leap intends to sell the prepaid 16 GB iPhone 4S for $500, far higher than the average $200 price tag offered by its contract-based rivals. The company will also offer the 8 GB iPhone 4 for $400. In exchange for the higher initial payment, Leap customers will pay lower monthly fees without any contractual obligations. While Leap has high hopes for the iPhone, pessimists believe that the company will have trouble increasing sales volume enough to avoid margin compression in the coming year. The high initial price could turn off potential customers, and a smartphone might not appeal to Leap's traditional user base of "no-frills" handsets. Apple's heavy subsidies have also hurt wireless providers, such as AT&T and Verizon, in the past.
AT&T took a costly hit during its fourth quarter due to hefty iPhone subsidies. Analysts believe what injured AT&T could likely kill Leap. It is estimated that Apple will take $150 from Leap for each $500 iPhone sold. Leap is scheduled to start selling the iPhone of June 22, offering unlimited plans for $55 per month. This has alarmed some analysts, who believe that the increased usage of these unlimited plans could impact margins as data usage outpaces available bandwidth. All the major wireless providers - AT&T, Verizon and Sprint - have faced this costly dilemma over the past five years.
AT&T CEO Randall Stephenson has taken note of Leap's ambitious and costly plans, and that it would offer his company valuable insight into demand for a prepaid, non-contract iPhone. "Moving the entry point by $100 has a dramatic effect on demand," Stephenson stated. "We are going to watch it. It's an interesting model."
Leap's deal with Apple reminded many investors of Sprint's (S: Charts, News) $15.5 billion, four-year commitment to sell the iPhone. Both Leap and Sprint have made outsized bets to tie their fates to the iPhone. However, there are no guarantees that Apple will still dominate the smartphone arena after three to four years. With the rise of Android handset makers, most notably Apple's nemesis Samsung, the future is uncertain for the slippery market of fickle smartphone users. If the iPhone's market share declines during this time, then Leap could be left holding the bag with a very large bill to pay off.
Leap is trading near the bottom of its 52-week range of $4.68 to $17.13. Shares are down nearly 70% over the past 12 months.
Other News About LEAP
Leap commits $900M over three years to Apple for iPhone Is the company looking before it leaps?
Leap Wireless to sell iPhone starting June 22 Leap sets a release date for its prepaid iPhone.
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Published on Jun 4, 2012By Leo Sun