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31-05-2012 17:41:00

2nd UPDATE: Leap Wireless To Sell Prepaid iPhone Next Month

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--Leap to start selling a prepaid version of the iPhone next month

--Leap to offer 16-gigabyte iPhone 4S for about $500 and a voice/data plan for $55 per month

--Leap says move meant to keep customers, improve store traffic

(Updates throughout with additional details from company's conference call.)

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 prepaid carrier to offer the popular device in the U.S.

Leap shares erased earlier gains and recently were down 2.6% at $5.62, in line with the broader market. The stock was down 66% in the past year as of Wednesday's close.

The addition of the iPhone increases the reach of the popular device for Apple and brings a marquee product to Leap's Cricket service, which has been experiencing slow customer growth. In order to carry the phone, Leap struck a three-year deal with Apple and agreed to spend $900 million over the contract.

In a conference call Thursday, Leap's Chief Executive Doug Hutcheson said there "would be no material financial impact in 2012" from the Apple deal, but added that the company expects "pretty meaningful positive effects beyond this year."

The San Diego company will offer the iPhone 4S and iPhone 4 with its $55 per month wireless plan beginning on June 22. It will sell the 16-gigabyte iPhone 4S for $499.99 and the older 8-gigabyte iPhone 4 for $399.99. Presales start June 15.

An unlocked iPhone 16-gigabyte 4S is $649 from Apple.

Those prices also are higher than what is currently offered by other larger carriers. They require customers to sign a two-year contract in exchange for the subsidy that covers a portion of the phone's cost. AT&T Inc. (T) offers a comparable iPhone 4 for $99.99 and Verizon Wireless sells a similar iPhone 4S for $199.99, according to the carriers' websites.

J.P. Morgan analyst Philip Cusick estimates Leap will subsidize each iPhone by about $100 to $125, which is above its typical $50 to $100 smartphone subsidy.

Besides attracting new customers, Leap is betting that the iPhone will reduce customer losses and drive new traffic into its stores. The idea is to retain customers that might upgrade to the iPhone and switch to a traditional post-paid contract by offering them what they need from their current provider.

"Loyalty is higher, and churn is lower with iPhone," Hutcheson said.

The iPhones will come with a $55-per-month unlimited talk, text and data plan, but 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.

The actual impact on Leap, though, remains unknown, 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.

ISI analyst Brian Marshall said the Leap deal doesn't change the economics for Apple, but the new prepaid option may give the iPhone a start in penetrating the lower-income segment of the wireless market.

In the first quarter, Leap and its main competitor MetroPCS Communications Inc. (PCS) showed a slowdown in customer growth, raising concerns about the low end of the U.S. wireless market. Analysts expressed concern that the economics of the business are 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 the company is using subsidies to lower the rate of customer churn. He notes that Leap is going to spend about a third of its estimated equipment costs on the iPhone, but expects it to be about 10% of handset sales. He sees that disparity resulting in increased equipment costs, which will pressure margins.

Verizon Wireless, a venture between Verizon Communications Inc. (VZ) and Vodafone Group PLC (VOD), was the first to break AT&T's iPhone exclusivity last year, followed by Sprint Nextel Corp. (S) in October.

-By Thomas Gryta, Dow Jones Newswires; 212-416-2169; thomas.gryta@dowjones.com

--Mia Lamar and Greg Bensinger contributed to this report.

(END) Dow Jones Newswires

May 31, 2012 11:41 ET (15:41 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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