Virgin Mobile, Leap Turn to iPhone to Spur Prepaid Market - Businessweek

Virgin Mobile, the pay-as-you-go carrier owned by Sprint Nextel Corp. (S) (S), plans to open its first 10 retail stores tomorrow in Chicago, aiming to profit from the iPhone’s expansion into the prepaid wireless market.

Virgin Mobile will become the second U.S. prepaid service to offer the Apple Inc. (AAPL) (AAPL) device, following the iPhone’s debut at Leap Wireless International Inc. (LEAP) (LEAP) on June 22. The new stores also mark a strategy shift for Virgin, which has previously relied on retailers such as RadioShack Corp. and Best Buy Co. to market its service, said Jeff Auman, a vice president at the carrier.

Pay-as-you-go companies, which let customers get mobile- phone service without credit checks and long-term contracts, are trying to reinvigorate the market by offering the iPhone and other popular smartphones. The industry has seen its growth slow in recent years, hurt by major carriers rolling out better phones and more flexible payment plans.

“We think there’s good demand for high-end devices like the iPhone in the prepaid market,” Sprint Chief Executive Officer Dan Hesse said in an interview. “There’s a misperception that the prepaid market is only for people that are economically challenged. That’s not the case. Our expectation, based on preorders, is that the iPhone will do very well on Virgin.”

National Rollout

Sprint, which acquired Virgin Mobile in 2009, runs the decade-old business as a separate brand, with Virgin Group founder Richard Branson serving as the public face of the company. The carrier will begin selling the iPhone online today, with the stores opening tomorrow. The 10 Chicago outlets could lead to a national rollout, the company said.

Prepaid carriers sell phones with smaller subsidies, forcing customers to pay higher upfront prices. Users then get the benefit of relatively low rates and no long-term commitment. Virgin is selling the iPhone 4S for $649 and the older iPhone 4 for $549, with monthly plans running between $30 and $50. Those prices include a $5 discount if customers sign up for automatic monthly payments. Leap, meanwhile, is selling the iPhone 4S for $500, with a $55 monthly plan.

In the first quarter, the iPhone was the best-selling smartphone at AT&T Inc. (T) (T), Verizon Wireless and Sprint, the three major U.S. carriers. The Apple product represented 54 percent of all phones sold at AT&T, 32 percent at Verizon and 34 percent at Sprint, according to BTIG LLC.

Rival Smartphones

The lack of an iPhone has put U.S. prepaid companies at a disadvantage until now. To satisfy customers’ desire for Internet-equipped models, they’ve relied on smartphones from Samsung Electronics Co. (005930), Research In Motion Ltd. (RIM) and ZTE Corp. (763)

Slowing growth in the prepaid market also has contributed to takeover talk. MetroPCS (PCS) (PCS) Communications Inc., a Richardson, Texas-based no-contract carrier, has discussed merging with Deutsche Telekom AG’s T-Mobile USA division, people familiar with the matter said last month. MetroPCS shares jumped 14 percent on the news.

Overseas, prepaid carriers have already made inroads with the iPhone. Worldwide, Apple shipped about 4 million prepaid iPhones in the first quarter, according to Strategy Analytics. The shipments added up to about 11 percent of Apple’s total unit sales of the device, the research firm found. In the U.S., about 28 percent of wireless consumers use prepaid plans, Strategy Analytics said.

By working with Leap and Virgin Mobile, Apple is “making the best smartphone available to an even broader market in the U.S.,” said Natalie Harrison, a spokeswoman for the Cupertino, California-based technology company.

Willing Customers?

Leap, based in San Diego, declined to say how the iPhone has sold in the week since its release. The company would have to sell 125,000 iPhones per quarter to fulfill its commitment to Apple -- or about 10 percent of all phones that Leap sells, according to Walter Piecyk, an analyst at BTIG in New York.

John Weber, an analyst at Framingham, Massachusetts-based IDC, expects the iPhone to increase the prepaid wireless industry’s growth and expand its customer base. He predicts that users will grow at a 10 percent clip now, compared with his previous projection of 7 percent.

“Without a question, it’s likely to boost the prepaid market,” Weber said.

Still, some of the biggest prepaid carriers remain on the sidelines. MetroPCS doesn’t sell the iPhone, though that may change if Apple rolls out a version with long-term evolution technology -- a network standard that offers speedier service.

“If we were able to see the iPhone in the LTE, we’d certainly be interested,” MetroPCS President Tom Keys said.

Aiming Lower

MetroPCS has had talks with Apple about the device, Keys said. For now, the carrier is focused on lower-cost smartphones. Its goal is to sell a $99 smartphone within six to nine months, he said.

TracFone Wireless Inc., owned by America Movil SAB, operates at the low end of the market and doesn’t have the iPhone either. It’s beginning to shift to smartphones, though. Earlier this month TracFone bought Simple Mobile, which lets consumers use its service with a smartphone they already have.

The largest contract carriers say they don’t expect to feel an impact from the prepaid iPhone.

“The competitive landscape that makes up the wireless industry is one in which we compete daily, so this is business as usual,” said Brenda Raney, a spokeswoman for Basking Ridge, New Jersey-based Verizon.

Contract Convenience?

Most customers still want the convenience of a two-year contract, said Mark Siegel, a spokesman for Dallas-based AT&T. “We also offer customers a compelling selection of prepaid plans and devices that work with any budget.”

Prepaid carriers have other challenges. Getting the iPhone cheap enough to entice customers may require increasing subsidies -- something the companies have largely avoided until now. Carriers also have to make commitments with Apple to buy a certain number of phones. Sprint is on the hook to sell $15.5 billion’s worth, though that includes sales through Virgin Mobile and the parent company.

“Everyone thinks that the iPhone is the golden ticket, but it comes with a lot of weight,” said Will Stofega, an analyst at IDC. “But it could increase traffic in a store, and give them a marquee offering.”

To contact the reporters on this story: Olga Kharif in Portland at okharif@bloomberg.net; Scott Moritz in New York at smoritz6@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net