There may be more to Apple’s new deal with Leap Wireless than meets the eye. Apple could be using Leap through its Cricket Wireless brand as a guinea pig carrier to test if American consumers are ready to pay full price for their iPhones, according to BTIG analyst Walter Piecyk. If that’s the case the implications could be enormous: Apple could shed the mortal coil of the operators and start selling its iconic smartphone directly to consumers.
(Apple may be expanding its experiment beyond Leap. According to TechnoBuffalo, Sprint prepaid operator Boost Mobile is getting the iPhone as well.)
Apple already offers unsubsidized iPhones in the Apple Store and through other sales channels, but it’s hardly the focus of its strategy. Apple’s primary sales channel is the carriers that absorb much of the cost of the device up front. In exchange, the carriers lock subscribers into long-term contracts and ultimately charge their customers higher voice and data rates to recoup those subsidies.
The prepaid service Leap offers through its Cricket Communications brand turns that model on its head. It charges a higher price for the phone — in this case $500 for the 16 GB iPhone 4S and $400 for the 8 GB iPhone 4 — in exchange for a much lower monthly service plan. American consumers have typically fallen for the allure of the cheap phone, which has made Apple reluctant to challenge the traditional subsidy model, but Piecyk thinks Apple may be reconsidering its strategy. From the BTIG blog (registration required):
We believe that industry-wide Q2 phone sales have been sluggish as we previously forecast and in addition Apple might already be feeling an incremental lag in iPhone sales ahead of an expected new product launch. To be clear, the less than 200,000 iPhones that Leap is likely to sell each quarter barely moves the needle for Apple, but Apple has added several small operators in the US during the quarter. More importantly, the change in upgrade policies by large US post-paid operators might have induced Apple to send the proverbial canary into the coal mine to see if the American consumer is willing to fork over $500 for a 16 GB iPhone 4S in order to save on a monthly data plan compared to the $200 that the post-paid operators are charging.
If that canary leaves the coal mine still singing (i.e., Leap meets or exceeds its modest sales expectations), Apple may very well have a huge opportunity on its hands. The number of SIM card plans has exploded in the past year, offered not only by T-Mobile and AT&T but a host of mobile virtual network operators (MVNOs) that ride over the former two operators’ networks. Tracfone’s Straight Talk offers essentially the same plans as AT&T at almost half the price ($45) and even undercuts budget services like Cricket.
MVNOs like Straight Talk and H2O Wireless hardly have the huge brand recognition of AT&T and T-Mobile, but if Apple were to decide the market is now ripe for unsubsidized iPhones, it could use its considerable marketing muscle to educate consumers about prepaid SIM card services.
Haven’t we heard this story before?
When Apple and AT&T launched the original iPhone in 2007, they charged full (or near-full) price for the devices: $500 to $600 depending on the model. After an initial rush, sales dropped, and it wasn’t until subsidies kicked in that the iPhone boom truly began. Given that history, Apple may be hesitant to dive back into unsubsidized sales again. But the market is different today than it was in 2007.
First, Apple’s initial foray into full-priced iPhones didn’t carry any benefit for the consumer. AT&T still locked customers down into two-year contracts and still charged high voice- and data-plan rates. Second, there are a lot more options for the iPhone today. There are now a plethora of MVNOs using AT&T’s networks, and T-Mobile (and its MVNO partners) will soon be able to fully support the device.
There’s also the question of whether Apple’s customers are willing to pay what Apple deems is the full retail value of the iPhone. Leap isn’t forcing its iPhone customers into contracts and is offering cheap data plans, but it’s still subsidizing the device. Its two versions of the iPhone are going for $150 less than what Apple charges for its unlocked phone in the Apple Store. A fully loaded iPhone 4S runs $850, which is going to be well outside many consumers’ price range. If Apple does pursue an unsubsidized strategy more aggressively, it may have to focus on older-generation models, which it sells at much steeper discounts.