Leap Wireless — the parent company of mobile operator Cricket — just got a very pretty feather in its cap: The company will be the first mobile operator in the United States to offer the Apple iPhone on a prepaid plan. And it won’t be the aging iPhone 3GS: Starting June 22, Cricket will be offering the same iPhone 4 and iPhone 4S available from bigger rivals AT&T and Verizon Wireless.
Of course, prepaid iPhones will have a higher up-front cost: an 8GB iPhone 4 will start at $400 and a 16GB iPhone 4S will start at $500. But customers won’t be locked into a pricy two-year service agreement with Cricket — and Cricket’s service is inexpensive compared to the big boys. Just $55 a month gets users unlimited voice and text and up to 2.3GB of data service per month. (After 2.3GB, Cricket throttles down bandwidth, but doesn’t cut customers off.)
Could prepaid iPhones represent the next big frontier for Apple? Or will Cricket’s experiment with prepaid iPhones merely go down as a footnote in mobile history?
It’s easy to argue that smartphones don’t cost consumers all that much: With carrier subsidies, out-of-pocket costs to consumers for even the latest high-end devices are commonly $300 or less. Inexpensive (yet still highly capable phones) are available for under $100 — or even for free. (Heck, the Apple iPhone 3GS — originally released way back in 2009 — continues to be a hot “free” item for AT&T). Suffice to say: These days, the up-front cost of a smartphone is often less than many consumers spend on gasoline in a month.
However, the true expense of owning a smartphone isn’t the up-front cost of the device: It’s the total cost of voice, messaging, and data plans. Common low-end smartphone service plans start at between $50 and $70 per month, and come with a two-year minimum term. During the course of the contract, customers wind up paying thousands of dollars to mobile operators. Sure, they can get out of those two-year deals, but wind up paying an early termination fee that covers the rest of the cost of their mobile handset. (Plus a little sugar for the carrier — kind of a last flip of the bird to a customer who has the nerve to defect.) It’s not unusual to have to pay $350 to get out of a smartphone contract.
Prepaid phone plans side-step all that. Consumers pay a higher cost up-front for the phone — because they aren’t as subsidized — but aren’t locked into a contract. Consumers pay month by month just for the service they use. Going to be out of the country for two months? No need to pay for service. Moving and want to switch to a different operator? Just move the phone to another operator’s pre-paid plan, no termination fees. Not a mobile power user who can justify the high total costs of two-year contracts? No problem: Buy a device, try it out. If you don’t like it, cancel and maybe recoup some of your costs by selling the handset on eBay or Craigslist. As a result, pre-paid plans have become more-or-less mainstream for low-income households — particularly given the economic woes of the last several years — as well as for secondary phones and folks who just don’t center their lives around a mobile device.
A number of capable Android devices have been available for the last few years via every major mobile operator and most smaller U.S. regional operators, but until now the iPhone has largely been available in the United States on contract. The only way to convert to a month-to-month plan was to exhaust an initial two-year deal — by which time consumers are probably starting to think about a new iPhone anyway. (Apple does offer unlocked contract-free GSM-only iPhones: Prices start at $649. They’re mainly intended for customers who plan to travel or use the phone outside the United States.)
So the promise of an iPhone available on a pre-paid basis via Cricket is a fully-fledged iPhone with a full range of services and a much lower cost of ownership than an iPhone on a major carriers’ two year contracts.
Cricket doesn’t disappoint. Here’s how the total costs of Cricket’s pre-paid iPhone plan compare to plans from the three major U.S. carriers:
As the table show, extended out over two years, Cricket’s pre-paid iPhone plan essentially beats anything offered by the three largest U.S. mobile operators. The sole on-paper exception is AT&T’s bare-bones contract; however, it’s worth noting AT&T includes just 450 voice minutes, no text messaging (customers pay an additional fee for every message they send or receive), and data use is capped at 300MB per month. A more-or-less comparable plan from Verizon is much the same, but with a data ceiling of 2GB per month. In contrast, Cricket offers unlimited voice, unlimited messaging, and 2.3GB of unfettered data every month.
This table is a bit misleading: The upper ranges of iPhone costs over two years assumes a customer opts for both the most expensive iPhone (currently a 64GB iPhone 4S) and the most expensive data plan available from a carrier. (Although I’ve omitted add-on costs for mobile hotspot service, which can add anywhere from $480 to $1,200 in additional charges of two years.) The upper range of that cost figure applies to only a tiny handful of iPhone users — most of whom are likely corporate types who aren’t paying for the device out of their own pockets anyway.
Still, Cricket’s plan represents a savings. Cricket estimates that the average cost consumers pay for an iPhone over two years is around $2,775. Last year, the Wall Street Journal estimated the average two-year cost of owning a smartphone (not just an iPhone) is about $2,100 just for service, but consumers typically wind up closer to $3,400 over two years with fees, overages charges, and other costs. (And, we might add, that was before LTE.) So, for typical smartphone users, one could argue Cricket’s pre-paid plans represent a rough savings of anywhere from $400 to as much as $1,600 over the course of two years.
If you’re wondering why Cricket isn’t offering even an even cheaper deal with the iPhone 3GS, it’s all about technology. Cricket’s mobile network operates on CDMA technology, not GSM. The iPhone 4 was the first iPhone to support CDMA — which let the iPhone 4 become available on Verizon. The iPhone 4S also supports CDMA, but the iPhone 3GS never did. At this point, Apple is not going to go back and produce a CDMA version of the iPhone 3GS.
Will crickets be the only thing customers hear?
Sound too good to be true? Well, for hundreds of million of Americans, that will be exactly the case. Although Cricket trumpets that it offers coverage in all 50 states, the simple fact is that Cricket’s network covers only about 90 million Americans. (Last I checked, there are about 315 million people living in the United States.) But not all of Cricket’s network can support the iPhone: Only about 60 million Americans are in coverage areas where Cricket can provide iPhone service. For folks who don’t live in Cricket’s coverage areas, their prepaid iPhones aren’t even an option. For folks who travel, Cricket’s limited geographic reach could be an absolute deal breaker.
Although customers who go with no-contract iPhones through Cricket would presumably be able to turn to Apple’s generally very well-regarded customer service in the event of a problem with the device, folks who need who need to deal with Cricket about a problem might run into troubles. Although Cricket has reasonable retail presence in some areas, in many parts of the U.S. it can literally be hundreds of miles between Cricket corporate stores. Cricket does offer phone and Web-based support.
Of course, the ultimate arbiter of a wireless provider is service quality. No wireless operator gets off scot-free on this measure: For every customer who seems to do well with service from a particular operator, there seem to be others who have terrible problems with the same operator in the same geographic area. (One of my favorite examples is a freak of topography, but there are places one can stand within sight of T-Mobile’s USA’s headquarters and get absolutely no signal from T-Mobile.) Folks considering a prepaid iPhone through Cricket who aren’t already Cricket customers should probably check not only local coverage maps (to see if any service is available at all) but see what local Cricket users have to say — bearing in mind that an typical Internet search is more likely to turn up complaints than satisfied customers.
Could prepaid iPhones take off?
Does Cricket’s prepaid iPhone mean Apple is seriously moving into prepaid offerings in the U.S., or will it just be a small exception in Apple’s otherwise contract-based business model?
The iPhone is indisputably the hottest device in the mobile world — so much so that Sprint was willing to make Apple a five-year, $15.5-billion deal just to be able to carry the device. That’s a huge bet on the iPhone — but, so far, no carrier has made a mistake by offering the iPhone. Compared to Sprint, Cricket’s deal is minor. In a conference call with analysts, Leap CEO Doug Hutcheson disclosed that it has committed to paying Apple $900 million over the course of three years for the iPhone. Furthermore, Leap isn’t betting Cricket’s lifeblood on the iPhone: Overall, it expects the device will represent just 10 percent of Cricket’s overall sales — in part because the $55-a-month plan for the iPhone is quite a bit more expensive than the $25-a-month and $35-a-month plans Cricket offers for other phones.
Cricket currently has about 7 million subscribers. Assuming no subscriber growth, that means Cricket figures about 700,000 users will wind up with iPhones in about three years, and some very rough back-of-the-envelope math indicates Cricket is very confident it can sell at least half a million prepaid iPhones in that time. It’s a safe assumption that Cricket’s customer base will grow: According to the New Millenium Research Council, prepaid plans are growing faster than traditional contract-based wireless plans, and about one in four U.S. wireless users is now on a prepaid plan. Further, U.S. consumers also don’t seem to change carriers very often: The average prepaid customer sticks with a carrier for about 20 months, according to a recent survey from PricewaterhouseCoopers. That might be because the United States mobile market has historically been fragmented into incompatible GSM and CDMA networks, so switching providers can be complicated or require a new device. But it means prepaid customers generally stick around nearly as long as contract customers.
In that kind of environment, iPhones could be a success for prepaid operators. Since so many consumers want iPhones, prepaid iPhones would likely lure some customers to prepaid carriers who otherwise would only have considered the three nationwide operators. And prepaid iPhones are probably more lucrative than almost any other device, since they have very low customer defection rates. A customer who buys an iPhone is likely to stick with it. And, just how Verizon and Sprint were left out in the cold when the iPhone originally launched, now that Cricket has a pre-paid iPhone, every other pre-paid carrier will want it too.
And you have to think T-Mobile is watching very carefully.