Leap Wireless confirmed in a SEC filing earlier this week that it is struggling to sell its allotment of iPhones. If sales don’t pick up, the company could be stuck with $100M in unsold iPhones by the end of the year and $150M by mid-2014.
The wireless company started selling the iPhone in June 2012 through its Cricket brand and signed a three year agreement to sell $800M worth of iPhones during this period. This sales agreement is not starting off so well with Leap predicting it will sell only half of its first-year minimum purchase commitment by the end of June 2013. If Apple holds Leap to its agreement, the company could be left with $100M in unsold iPhones by the end of the year. Leap projects this situation could have “a material adverse impact on our business, results of operations and financial condition.”
Why is Leap struggling to sell iPhones when carriers like Verizon, AT&T and Sprint are selling millions each quarter? It all comes down to pricing and subsidies. Leap is selling the iPhone 5 for $449 without a contract, and US customers are not accustomed to paying such a high price for a phone. Most people would rather spend $200 or less for an iPhone with a two-year agreement than pay full price for the freedom of not having a contract. The deep discounts on phones offered by the contract model is alluring to US customers, even more alluring than the iPhone itself.