Sprint (NYSE:S) has become the latest wireless carrier to abandon the two-year contract model, but the company has done so with a twist.
The number four wireless carrier joins T-Mobile (NASDAQ:TMUS) and Verizon (NYSE: VZ) in dropping offering phone subsidies in exchange for customers being locked in for 24 months leaving only AT&T (NYSE: T) using what had been the standard for carriers. But, while its rivals simply moved to financing and outright purchases for phones, Sprint has decided to lean on a model built around leasing.
Specifically the company has made a strong effort to lock customers in with a lease offer designed to cater to fans of Apple's (NASDAQ: AAPL) iPhone.
What is Sprint doing?
The struggling wireless carrier has created a program where customers can lease the latest iPhone for a monthly fee with the right to trade in that phone for a new one whenever Apple updates the line. Called iPhone Forever subscribers pay $22 a month for an iPhone 6 ($15 for qualified customers for the rest of the year) and can upgrade when the new model comes out. That's not a one-time upgrade. As long as users stay in the program they are eligible for a new phone every time Apple releases one.
"We asked ourselves, 'What could we do that would move our customers forward with the latest and greatest technology every day?' said CEO Marcelo Claure on the company's website. "We decided: How awesome would it be if anytime customers don't have the latest iPhone, they are eligible to upgrade, and have it be as simple as handing us your existing iPhone and picking up a new one – all included in your monthly rate."
This is good for some customers
iPhone Forever should appeal to Apple fans who always want to have the latest phone but were forced to hold onto an older model until becoming eligible for an upgrade under the old subsidized model. Leasing, for this type of user is also cheaper than buying.
An iPhone costs $649.99 if you pay Sprint the full retail price up front or $27.09 for 23 payments and $26.92 for the 24th should you choose the company's two-year financing offer. Paying $22 for a lease does save money on your monthly bill, but with one huge drawback -- you never own the phone or build any equity.
That's actually OK if you're the type of person who buys out his or her contract in order to upgrade every year. For anyone willing to hold onto their phone for a full two years this is probably a bad deal, Yes, you pay a little less each month, but the increased fees would likely be made up at the end of the contract by selling your phone.
It's good for the company
Offering phones via leases and giving customers the ability to upgrade more often than the traditional two-year time period makes sense for Sprint. iPhone Forever essentially replaces a contract with another program that keeps customers loyal.
The company collects slightly less money each month for every iPhone it leases, but it still owns those phones and can recoup any losses by selling them when the customers turn them in. This deal cleverly ties people who want the latest and greatest iPhone to Sprint without the messiness of a contract (which other carriers have been willing to pay off anyway in recent years).
A sign of things to come
iPhone Forever is clever and it should appeal to Apple's biggest fans. That should help Sprint both retain and add customers which it badly needs to do,
Most importantly the lease deal shows that Sprint, under Claure, is capable of leading, not just following. Expect other wireless providers to follow with similar offers as the industry tends to work that way, Sprint deserves credit for unorthodox thinking.
One deal won't turn things around for the fourth-place carrier. It's going to need constant innovation, but iPhone Forever at least shows that the company can play the game at the level required to return to meaningful growth.
Daniel Kline owns shares of Apple. He wants the latest iPhone even if it's worse than the current one. The Motley Fool recommends Apple and Verizon Communications. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.