In a report filed by the Wall Street Journal, Leap Wireless has confirmed that it faces excess iPhone inventory during the first year of its sales agreement with Apple to sell the iPhone as part of a then landmark agreement with the Tier 2 flat-rate carrier. The company’s total iPhone sales shortfall for the first year is expected to near the $100 million mark, owing to lower than expected sales of the device since beginning sales last Summer.
Leap Wireless signed a then landmark agreement with Apple Inc to sell the CDMA iPhone 4 and 4S in the Spring of last year, ahead of the launch of the iPhone 5 in October. At the time of the agreement, CEO Doug Hutcheson aimed to position the iPhone as a major differentiator for Cricket Wireless compared to other flat-rate carriers and MVNOs, especially as Cricket/Leap subsidized the iPhone 4 and 4S to a point in order to draw new customers, banking on the idea that the lower upfront costs and the lower monthly rates would draw masses of new customers.
Unfortunately, several factors since that launch had taken Cricket/Leap Wireless’ original plans and aided in the sales shortfall. First, shortly after Cricket/Leap signed its sales agreement, Virgin Mobile rolled out its version of the iPhone 4 and 4S with even lower monthly rates later that Summer, while other MVNOs such as StraightTalk were heavily promoting BYOD for the iPhone as well at equally low rates. In addition, Leap Wireless reported a loss of 337K customers last month as part of their 4th quarter earnings, exacerbating the shortfall and adding to the overall losses.
With the $100 million sales shortfall for the iPhone and the customer losses, it remains to be seen whether Leap/Cricket can correct the losses, especially as the carrier has already released the iPhone 5 since launch last September and is still struggling to meet its sales targets for the device, demonstrating how difficult it can be for carriers to meet sales targets for the iPhone without some luck. As the contract is set to expire this June, Leap/Cricket have yet to figure out how to address the shortfall in the short-term, which does not bode well for Apple’s initial goal of expanding the iPhone to the prepaid market, even as other prepaid carriers try their hand at iPhone sales.