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Sprint to Offer Prepaid iPhone

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Beginning next month, the third largest wireless carrier Sprint Nextel Corp. (S - Free Report) will offer the popular Apple Inc.’s (AAPL - Free Report) iPhone through its no-contract prepaid Virgin Mobile brand.

The move will make Sprint the second carrier to offer prepaid iPhones after Leap Wireless International Inc. . Leap is expected to offer iPhone from June 22 on a prepaid basis through its Cricket brand.

Leap’s Cricket will offer iPhone 4S for $499 and iPhone 4 for $399 with a prepaid service monthly plan of $55. The iPhone 4S has data storage capacity of 16 GB while iPhone 4 can store up to 8GB of data. Cricket will throttle the speed if data usage exceeds 2.3 GB per month.

Sprint has not yet disclosed its pricing plans for iPhones. Currently, Virgin Mobile provides unlimited data for $35 per month and throttles the speed after 2.5 GB of data usage. In addition, Sprint offers iPhone 4 for $99.99 and iPhone 4S for $199.99, much lower than Leap’s price.

Further, Cricket covers a small market, say about 20% of the populace, while Virgin Mobile has a nationwide footprint. We believe prepaid iPhone from Sprint would be widely adopted as compared to Leap’s Cricket brand. Also, the prepaid offering will help Sprint to fulfill its promise of paying $15.5 billion to Apple over the next four years. The company has to pay 40% more subsidies on iPhones than other smartphones. This equates to more than $200 per device.

Sprint’s prepaid wireless service is considered the major growth arena as contract (post-paid) customers are dwindling. Sprint added 489,000 prepaid users while lost 192,000 post-paid customers in the first quarter. Multi-brands like Boost Mobile, Assurance Wireless and Virgin Mobile, as well as innovative offers like $50 Monthly Unlimited plan with Shrinkage, Beyond Talk and Broadband2Go are contributing significantly to the company’s prepaid subscriber growth.

Additionally, Sprint plans to launch WiMAX service on a prepaid basis for both Virgin Mobile and Boost Mobile later this quarter. These expansions will provide Sprint a competitive edge over prepaid wireless carriers such as Leap, MetroPCS Communications Inc. , America Movil S.A.B. de C.V. (AMX - Free Report) , AT&T Inc. (T - Free Report) and Verzion Communications Inc. (VZ - Free Report) .

We are maintaining our long-term Neutral recommendation on Sprint. For the short term (1–3 months), the stock retains a Zacks #3 (Hold) Rank.

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