Sprint and Apple's iPhone 5: Much needed, but cheap iPhone 4 key

Sprint, which caters to customers with lower credit quality, may get more mileage out of offering a cheap iPhone 4 than the iPhone 5.

Sprint will reportedly get the iPhone 5 and the device will give the wireless carrier some much needed ammunition to battle Verizon Wireless and AT&T. However, Sprint's ability to sell a cheap iPhone 4 may be more important to the carrier.

According to the Wall Street Journal, Sprint will get the iPhone 5 in mid-October. As noted yesterday, Sprint and the iPhone will change the carrier dynamics a good bit. More importantly, the Journal noted that Sprint will sell the iPhone 4 too at a lower price. Sprint historically has catered to lower quality credit customers. In many respects, Sprint, which owns Virgin Mobile and Boost, is really betting on prepaid customers to boost growth.

Also see: Sprint to land Apple's iPhone: How wireless carrier dynamics will change

The iPhone 4 may mean more to Sprint than the latest version.

A cheaper iPhone could be a boon for Sprint. AT&T has defended Verizon courtesy of the iPhone 3GS, which sells for $49 with a two year contract. In the big picture, Sprint may get more out of the previous generation iPhone 4 than the iPhone 5.

Piper Jaffray analyst Christopher Larsen said in a research note:

While we had anticipated Sprint getting the new iPhone, we were surprised to see that the company would soon be selling the iPhone 4. AT&T has had great success selling previous generation iPhones at low prices (most recently $49), and we believe Sprint will certainly benefit from being able to sell a cheaper iPhone. Sprint has historically had lower credit quality subscribers and may have self-selected more price conscious customers with its pricing plans; we think this customer base is ripe for buying a cheaper iPhone.

With the iPhone 4, Sprint can get more customers under contract, better compete with AT&T and maybe give Verizon Wireless a run. At the very least, Sprint iPhones will allow the carrier to hold its own and remain a viable No. 3 in the market. On Sprint's second quarter earnings conference call, CFO Joe Euteneuer said:

We faced a number of competitive headwinds that became more pronounced in the second quarter. This includes the first full quarter both major competitors offered the iPhone, aggressive pricing on the iPhone as well as a variety of other handsets.

Jennifer Fritzsche, a Wells Fargo analyst, said Sprint had to upgrade its smartphone portfolio:

Sprint's portfolio of handsets of late have not been appealing enough to move users away from AT&T and (especially) Verizon, in our view. While we believe Sprint's value message resonates with many users, lack of an iconic device has clearly hurt the momentum it saw building in the later part of last year.

Granted, Sprint's move to sell the iPhone won't be all roses. Sprint will have to beef up its network and it will see thinner margins. On the upside, Sprint is likely to add customers and lower churn rates.

Fritzsche added that there are significant questions about Sprint's wireless spectrum and investment needed to handle the iPhone's data requirements. It also remains to be seen how Sprint's Clearwire deal fits in with the iPhone.

Piper Jaffray analyst Gene Munster estimated that Sprint would move an additional 6 million iPhones for Apple in calendar 2012. Roughly speaking, Apple's iPhone growth rate will jump from 30 percent to 37 percent. Apple's calendar 2012 earnings per share will be $34.59 a share, up from Munster's previous estimate of $33.72 a share.

Munster is basing his Sprint estimate on Verizon, which is expected to sell 12 million iPhones in the first year of offering the device.

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