--Leap to start selling a prepaid version of the iPhone next month
--To offer 16-gigabyte iPhone 4S for about $500 and a voice/data plan of $55 per month
--Leap says move meant to keep customers, improve store traffic
(Adds details on agreement, comments from CEO and analyst beginning in first paragraph, and updates stock prices.)
By Thomas Gryta Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Leap Wireless International Inc. (LEAP) will start selling Apple Inc.'s (AAPL) iPhone next month, making it the first carrier to offer the popular device in the U.S. without forcing customers to agree to a multiyear contract.
The arrangement increases the reach of the popular device for Apple, while adding a marquee product to Leap's Cricket service, which has been seeing customer growth slow. In order to carry the phone, Leap struck a three-year deal with Apple under which it agreed to spend $900 million in volume purchases.
Leap Chief Executive Doug Hutcheson said there "would be no material financial impact in 2012" from the Apple deal, although the company sees it eventually helping to reduce the rate at which customers leave, known as churn, and drive new traffic to its stores.
"Loyalty is higher, and churn is lower with iPhone," Hutcheson said in a conference call Thursday. The idea is to retain customers by offering them what they want, so that they don't upgrade to the iPhone and switch to a provider of contract wireless service.
Meanwhile, for Apple, the Leap deal doesn't change the company's economics, ISI analyst Brian Marshall said, but the new prepaid option may give the iPhone a start in penetrating the lower-income segment of the wireless market.
The San Diego-based Leap will offer the iPhone 4S and iPhone 4 with its $55- per-month wireless plan beginning on June 22. Presales start June 15.
Leap will sell the 16-gigabyte iPhone 4S for $499.99 and the older 8-gigabyte iPhone 4 for $399.99. Leap's iPhone prices are roughly $300 more than those sold by rivals AT&T Inc. (T), Verizon Wireless and Sprint Nextel Corp. (S), but $150 less than what Apple charges for an unlocked 16-gigabyte iPhone 4S.
The difference in phone price reflects the smaller subsidy that Leap is paying for the iPhone. J.P. Morgan analyst Philip Cusick estimates Leap will subsidize each iPhone by about $100 to $125, which is above its typical smartphone subsidy of $50 to $100 but well below that paid by other carriers for the iPhone.
Leap plans to get future iPhone devices but wouldn't disclose details of the agreement with Apple.
While Leap charges customers more for the phone, its monthly service plan of $55 for unlimited talk, text and data is more attractive than rivals. In comparison, monthly plans from other wireless carriers are frequently $100 or more, and users there are locked into a two-year contract.
Leap warned that full-speed data will only be available up to a threshold of 2.3 gigabytes a month, after which the data speed will be slowed, a process known as throttling, which other carriers also do. According to Verizon Wireless, 2.3 gigabytes of monthly data is the daily equivalent of 50 emails, 25 web page visits, uploading two photos and watching 10 minutes of streaming video.
Leap is in the midst of changing its smartphone strategy with plans to offer four or five new devices in the next two to three months, along with new data plans that could be used with the iPhone.
"We will have new rate plans to provide consumers more choice. We will evolve how we sell data," Hutcheson said, noting that unlimited data plans aren't profitable or feasible.
The company has tested its network and doesn't expect the iPhone to have an effect when customers begin using it.
The iPhone's actual impact on Leap remains an open question, J.P. Morgan's Cusick said, partly because such expensive phones are "nearly irrelevant" to prepaid customers who aren't likely to shell out so much cash at one time.
Leap currently offers smartphone ranging from $100 to $300, but Hutcheson said the company will explore financing options to make the iPhone more accessible to customers.
The deal with Apple isn't exclusive, and Leap's Hutcheson expects that someone else will launch a prepaid iPhone. Such providers could include MetroPCS Communications Inc. (PCS) or Sprint, both of which declined to comment.
Leap shares--down 66% over the past year--slid 0.5% to $5.74 in late trading. MetroPCS shares declined 3% to $6.52, while Sprint lost 0.4% to $2.59. Apple dropped 0.1% to $579.89.
In the first quarter, Leap and MetroPCS showed a slowdown in customer growth, raising concerns that the economics of the prepaid business were deteriorating amid a weak economy and a shift to smartphones that need to be subsidized.
Nomura analyst Mike McCormack said Thursday that Leap's addition of the iPhone highlights his concern that Leap is using subsidies to lower the rate of customer churn. He noted that Leap is going to spend about a third of its estimated equipment costs on the iPhone, but expected the phone to be about 10% of handset sales. He sees that disparity resulting in increased equipment costs, which will pressure margins.
Hutcheson described the 10% sales projection as "conservative" and he expected to build usage as the company gains experience selling the device.
In terms of the "modest subsidy" on the iPhone, he said device subsidies have gotten excessive for service providers.
"We are going to be more cautious about subsidizing handsets and provide handsets that people want with less subsidies," he said. That means if equipment costs don't drop, handset prices could rise for consumers.
-By Thomas Gryta, Dow Jones Newswires; 212-416-2169; thomas.gryta@dowjones.com
--Greg Bensinger contributed to this report.
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