The Wall Street Journal is reporting that Sprint, the third largest wireless operator in the US, is figuratively “betting the company” on the iPhone, having committed to buy 30.5 million iPhones – at a cost that could only be described as sureal. Citing the obligatory “people familiar with the matter”, the Journal wrote that Dan Hesse, the CEO, told the board in August that Sprint “would likely lose money on the deal until 2014”. He also convinced the board that the lack of the iPhone was “the No. 1 reason customers leave or switch”. The board then signed off on the so-called “Sony” project, even though they were aware of a “staggering” hit to Sprint’s operating income, because they realized Sprint couldn’t compete otherwise:
Mr. Hesse told the board the carrier would have to agree to purchase at least 30.5 million iPhones over the next four years—a commitment of $20 billion at current rates—whether or not it could find people to buy them, according to people familiar with the matter. In order to keep the price people pay for the phone low and competitive with rivals, Sprint would be subsidizing the cost of each phone to the tune of about $500, which would take a long time to recoup even at the high monthly fees iPhone users pay.
Directors debated what they had just heard. Some worried the payoff would be too long in coming. One member questioned whether the multiyear deal might outlast the iPhone’s popularity. To sell that many iPhones, Sprint would have to double its rolls of contract customers, convert all of them to the Apple device or a combination of the two.
Also surreal to say the least: BGR has heard that Sprint will actually get the rumored iPhone 5, which is said to be a 4G WiMax device. The story has it that Verizon Wireless and AT&T get to wait out until the first quarter of 2012 before launching a 4G LTE version of iPhone 5 on their respective networks. This could also explain why Verizon sided with Samsung in Apple litigation (and AT&T smartly kept their mouths shut).
Whichever way you look at it, the Sprint iPhone deal is HUGE. Apple has just secured additional shipments of up to eight million iPhones annually for the next four years. It’s reasonable that Sprint would sell that many iPhones a year and the deal would boost Apple’s annual revenues by five billion dollars. It also sends out a clear message to carriers that don’t yet carry the iPhone: Either you pay through the nose and get the phone that can turn your fortunes around or risk getting left behind.
There is probably not a single phone vendor bar Apple anywhere in the world capable of talking any carrier into pre-paying such a staggering amount of money for the privilege of carrying a smartphone. That is, unless the phone in question happens to be the iconic product everybody’s still lusting after. The 30.5 million iPhones worth $20 billion equal to an average selling price of $655, which is in line with what other carriers are reportedly getting as well. Now, you would have thought that committing to such a substantial bulk purchase would come with some concessions or rebates, but this is Apple and their CEO is known as a tough negotiator (yes, we’re talking about Tim Cook).