How many pre-paid buyers will pony up $650 for a new 16GB iPhone 4S to be able to get no-contract service starting at $30 a month?
Some analysts believe there won't be very many customers who will take advantage of such a plan, as announced this week by Virgin Mobile USA and luanching June 29. That's especially the case, the analysts said, with Android phones costing less than one-third of the iPhone on a typical pre-paid plan.
"I can't see too many Virgin customers calling up and saying I won't sign up for your service unless I can get an iPhone, especially since credible Android devices are one-half to one-fourth the cost," said Jack Gold, an analyst at J. Gold Associates.
"The costs of these [iPhones] is so high and we've seen little success in a non-subsidized model," like the one Virgin is offering, said Gartner analyst Phillip Redman. "I have many doubts this [Virgin] plan will work also, but Apple has surprised us before... Maybe there's enough pent-up demand at these small carriers, but the sales numbers won't be big."
Sprint, which owns Virgin, sees things differently, of course. Sprint and Leap Wireless, which buys Sprint network CDMA 3G service, are exploring ways to expand the popularity of the iPhone beyond the traditional base of post-paid subscribers.
Post-paid customers get the same iPhone subsidized by the Sprint, AT&T and Verizon Wireless for $199-- less than one-third the Virgin cost-- but must sign a two-year contract for monthly service is more than double the discounted $30 monthly price Virgin is offering for 300 minutes of voice and unlimited texting and data.
"The Virgin Mobile brand is extremely well-positioned to carry this iconic device and accelerate its growth as an alternative for previous post-paid subscribers," Jayne Wallace, director of communications for Sprint, said by email. "There's no question that the iPhone on both our pre-paid and post-paid platforms is a win-win for the business all around."
She explained that post-paid contracts are slowing down across the industry. "The growth area in the market continues to be the no-contract space," she added, explaining that was why Sprint acquired Virgin in 2009 and created its multi-brand Sprint Prepaid Group in 2010.
Pre-paid customers have traditionally been viewed as younger or on a budget and might not even have a credit account to pay for a two-year post-paid service plan. But Wallace indicated that "the face of pre-paid has changed from the traditional pay-as-you-goers, now that we can offer the better devices, services and value."
Even so, pre-paid customers are still not considered as profitable to carriers as post-paid, and Sprint has struggled more than AT&T and Verizon at keeping its post-paid customers in recent years. Sprint added 489,000 pre-paid customers in the first quarter, but lost 192,000 post-paid contract customers.
Still, there's an upsurge of interest in pre-paid industry-wide. AT&T and Verizon Wireless are considering offering the iPhone and more high-end smartphones to pre-paid customers, in the endless pursuit of more customers and more revenues, analysts said.
Boost Mobile, another pre-paid brand from Sprint, is also expected to offer the iPhone on a pre-paid basis, said Ramon Llamas, an analyst at IDC.
Paying $650 up-front for an iPhone with Virgin will be the biggest obstacle for pre-paid buyers, Llamas said. "That $650 is still a lot of money, no matter what the per-month cost," he said. "Forget about college students and just look at younger users who are now on pre-paid deals."
Llamas said there's obviously a market for the Virgin plan. "There are some buyers for it, but the question is just how big is that market? We know that pre-paid users want smartphones" based on current pre-paid purchases of BlackBerry and Android smartphones.
"Those BlackBerry and Androids on pre-paid plans aren't slouches as far as phones go, but the iPhone pre-paid will bring a new level of cachet and a new level of demand," Llamas said.
By comparison, Sprint's 24-month post-paid plan for smartphones offers 450 minutes of voice, plus unlimited text and talk for $79.99. With the $450 added cost of the iPhone on Virgin, the Virgin overall cost including $30 a month service and phone for two years would still be $750 less, or $31.25 a month less, than the post-paid plan.(The $30 service fee is discounted by $5 from $35 if a customer arranges for automatic payment with a credit or other account.)
Llamas said that customers will need to evaluate whether that $31.25 monthly difference is worth it, since any data usage above 2.5GB per month on Virgin could be throttled to a slower speed and since the Virgin coverage map seems to have some gaps that could effect a user's experience depending on where he works or lives. "Virgin would be fine in metro areas," he added.
Leap's iPhone offer on its Cricket service is $150 less for the up-front hardware cost than Virgin's, but Leap will charge $55 a month for unlimited voice, data and text. Leap's service is regional, not national, available to about 20% of the country. Leap is a separate Sprint company that operates as a Mobile Virtual Network Operator and buys network capacity from Sprint.
Whatever happens to Sprint's experiment with the Virgin Mobile pre-paid iPhone plan, Llamas noted that the ultimate winner is going to be Apple. Sprint has a four-year commitment to Apple to pay $15.5 billion for iPhones, and must satisfy the debt in whatever way it can.
"The one who's sitting pretty with all this pre-pay is Apple," Llamas noted. "Pre-pay to Apple is another distribution chain, another set of customers who may or may not upgrade to another phone regularly."
"This approach is another opportunity to sell more people on the iPhone and upgrade them," he said. "Sprint's the one on the hook."
Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld. Follow Matt on Twitter at @matthamblen or subscribe to Matt's RSS feed. His email address is firstname.lastname@example.org.
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