Tesco claims to beat O2 and Orange with £20 monthly iPhone deal

Tesco is to enter the increasingly crowded market for Apple's iPhone next week when the grocer will launch a mini price war on the smartphone. The supermarket group, which secured the rights to the phone last month, will start selling the 3G and 3GS iPhone models on Monday, offering a annual contract for just £20 a month. Customers will have to pay £222 for the basic 3G 8GB handset however.

The deal undercuts rivals O2 and Orange, which offer a lowest rate of just over £29 a month. Tesco also requires customers to sign up only for one year, compared to two years at its rivals, though their contracts make no charge for the phone. A fourth operator, Vodafone, is set to enter the market in "the first quarter" of next year, but is yet to give details on pricing arrangements.

Analysts are expecting price competition to intensify after Christmas, once all four groups are competing for customers. "France Telecom [which runs Orange] will keep prices high in the run-up to Christmas to ensure they capture premium subscribers who were starved of the iPhone but were loyal to Orange," said Will Draper of Evolution Securities. "When Vodafone joins the market the gloves will come off."

On securing the iPhone last month, the supermarket group promised to add "Tesco value" to the smartphone market. "[The] iPhone is now available and affordable for all, with the best deals in the UK market," claimed Lance Batchelor, the chief executive of Tesco Mobile and Tesco Telecoms.

"This is a fantastic announcement for us and we're delighted to make iPhone available to our customers. It shows what a serious player in the mobile market Tesco Mobile has become," he added.

Tesco Mobile is a joint venture between Tesco and O2, which did have an exclusive two-year deal with Apple to sell the iPhone until the autumn.

Tesco insisted yesterday that it was offering the lowest "cost of ownership" of the three networks, adding that its contracts offer more flexibility given the minimum 12-month, rather than two-year, deals. But few Orange or O2 deals, except those offering so-called "pay as you go" agreements, require customers to pay any upfront fee for the phone itself.

Tesco customers signing up to the entry-level deal get a "£60 credit bundle" for calls, texts and web browsing: typically, this would give iPhone uses 300 minutes of calls and 150 text messages. On a 24-month contract at £60 a month, Tesco Mobile customers will get unlimited calls and texts and a more recent model – the iPhone 3GS 16GB – for free. The iPhone will also be available to pay-as-you-go customers, for whom the 3G model will cost £342.

A spokesperson for Tesco said that, unlike Orange and O2, there were no plans to introduce business tariffs.