(Reuters) - Leap Wireless International Inc's (LEAP.O) plan to sell Apple Inc's (AAPL.O) iPhone raised investor concerns about margins at the U.S. provider of prepaid mobile services, sending its shares down 10 percent.
Leap said on Thursday that it would be the first U.S. prepaid mobile service to offer the iPhone, and that its contract with Apple would cost it an estimated $900 million over three years.
BMO Capital Markets analyst Peter Rhamey downgraded Leap to "underperform" from "market perform," saying the deal comes on the back of first-quarter results that saw acute pressure on margins and profitability from smartphone sales and upgrades.
Leap, which focuses on cost conscious customers, has been hit by increasing competition in the low-cost market that has forced some service providers to shift their focus toward smartphones.
Leap said it will sell the 16 GB iPhone 4S for $499.99, compared with its rivals' $199.99 price tag. Leap will also sell the older 8 GB iPhone 4 model for $399.99. Leap customers, however, will pay smaller monthly service fees and will not need to sign contracts.
The price may not be compelling enough to drive volumes, which may force the company to cut the price, leading to further margin compression, analyst Peter Rhamey said.
U.S. wireless operators like AT&T Inc (T.N) has long paid hefty subsidies for smartphones but are tightening their policies to temper upgrades after getting hurt by hefty iPhone subsidies in the fourth quarter. The quarter had seen the launch of the latest iPhone model.
AT&T Chief Executive Randall Stephenson wondered about demand for Leap's higher priced iPhone during an investor conference on Friday.
"Moving the entry point by $100 has a dramatic effect on demand. We are going to watch it. It's an interesting model," Stephenson said, adding that he would consider the idea of a lower subsidy and a lower service price if Leap's plan works.
Leap shares were down 50 cents at $5.26 in morning trade on the Nasdaq. AT&T shares were trading flat at $34.11 on the New York Stock Exchange.
(Reporting by Supantha Mukherjee in Bangalore and Sinead Carew in New York; Editing by Sreejiraj Eluvangal)
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