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Verizon Could Face Up to $14 Billion in Unsold iPhone Purchase Commitments for 2013
Bloomberg yesterday reported on a research note from analyst Craig Moffett pointing out that Verizon could potentially face a massive bill from Apple of up to $14 billion this year based on current iPhone sales rates and the carrier's commitment to purchase a minimum number of iPhones from Apple.
As Moffett points out, Apple's contract with Verizon requires the carrier to purchase more than twice as many iPhone this year as it did last year. During the first quarter of 2013, Verizon activated four million iPhones on its network, a figure representing roughly $2.5 billion in hardware value at Apple's average selling price of about $613 per unit.
While the first quarter may have been a somewhat slower one for the iPhone at Verizon following the iPhone 5 launch in September 2012, it only represented a 25% increase in units over the first quarter of 2012, indicating that the carrier is indeed well behind pace for meeting its purchase requirements for 2013.
Amounts in millions of dollars (Source: Moffett Research, company reports)
Apple is expected to introduce an upgraded iPhone 5S later this year, with a lower-cost plastic iPhone also apparently in the works, but it seems unlikely that those launches will be able to generate the massive increase in sales volume needed at Verizon to meet the carrier's contract requirements.
Moffett notes that it is unlikely Apple will require Verizon to pay the full amount of any shortfall this year, particularly if it reaches the $12-14 billion amount estimated by Moffett, but that any renegotiations will likely see Apple extracting some concessions from Verizon as the iPhone maker seeks to hold other carriers to their commitments.
Update: Nomura analyst Stuart Jeffrey has released his own note examining the situation and concurs with Moffett that Apple and Verizon are in a difficult spot. Verizon disclosed at the end of its 2012 financial statements that it holds $23.5 billion in purchase commitments for 2013, with Moffett and Jeffrey both believing that the iPhone accounts for the vast majority of that amount.
Jeffrey notes that Verizon could still satisfy its obligation by making a massive advance purchase of iPhones for 2014 at the end of 2013, although such a purchase would obviously have an effect on any purchase requirements to be built into a renewal contract with Apple. Alternatively, Apple could simply allow Verizon to roll over its commitment into 2014 in order to prevent Verizon having to make a massive expenditure at the of the 2013, although such an allowance would undermine Apple's minimum purchase agreements with other carriers.
Under a multiyear deal signed with Apple in 2010, Verizon Wireless is obligated to buy $23.5 billion worth of iPhones in 2013 alone, according to Craig Moffett, a telecommunications analyst who left Sanford C. Bernstein & Co. earlier this year to start his own research firm. Since the purchase commitment is more than twice what Verizon Wireless sold in 2012, the company may have a shortfall of $12 billion to $14 billion, worth $4 to $5 per share, Moffett said in the report.Apple routinely requires new iPhone carriers to commit to purchasing a certain number of iPhones over a period of years, a requirement that has led some carriers to balk at offering the device.
As Moffett points out, Apple's contract with Verizon requires the carrier to purchase more than twice as many iPhone this year as it did last year. During the first quarter of 2013, Verizon activated four million iPhones on its network, a figure representing roughly $2.5 billion in hardware value at Apple's average selling price of about $613 per unit.
While the first quarter may have been a somewhat slower one for the iPhone at Verizon following the iPhone 5 launch in September 2012, it only represented a 25% increase in units over the first quarter of 2012, indicating that the carrier is indeed well behind pace for meeting its purchase requirements for 2013.
Apple is expected to introduce an upgraded iPhone 5S later this year, with a lower-cost plastic iPhone also apparently in the works, but it seems unlikely that those launches will be able to generate the massive increase in sales volume needed at Verizon to meet the carrier's contract requirements.
Moffett notes that it is unlikely Apple will require Verizon to pay the full amount of any shortfall this year, particularly if it reaches the $12-14 billion amount estimated by Moffett, but that any renegotiations will likely see Apple extracting some concessions from Verizon as the iPhone maker seeks to hold other carriers to their commitments.
Update: Nomura analyst Stuart Jeffrey has released his own note examining the situation and concurs with Moffett that Apple and Verizon are in a difficult spot. Verizon disclosed at the end of its 2012 financial statements that it holds $23.5 billion in purchase commitments for 2013, with Moffett and Jeffrey both believing that the iPhone accounts for the vast majority of that amount.
Jeffrey notes that Verizon could still satisfy its obligation by making a massive advance purchase of iPhones for 2014 at the end of 2013, although such a purchase would obviously have an effect on any purchase requirements to be built into a renewal contract with Apple. Alternatively, Apple could simply allow Verizon to roll over its commitment into 2014 in order to prevent Verizon having to make a massive expenditure at the of the 2013, although such an allowance would undermine Apple's minimum purchase agreements with other carriers.
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73 months ago
And the geniuses keep training to push their employees to sell non iPhones....
73 months ago
Wasn't Verizon one of the carriers offering its sales folks bigger incentives to sell anything but the iPhone, such that these folks started steering even iphone intenders to other brands?
Kinda schizophrenic if you ask me.
Kinda schizophrenic if you ask me.
73 months ago
Put the blame on Verizon
If this is true, Verizon should be to blame. Every time you go to a Verizon store the sales people are never pushing the iPhone. If you ask about the iPhone, they immediately try to get you to buy a different phone. Their sales reps are obviously incentivized to sale other phones, not iPhones.
If this is true, Verizon should be to blame. Every time you go to a Verizon store the sales people are never pushing the iPhone. If you ask about the iPhone, they immediately try to get you to buy a different phone. Their sales reps are obviously incentivized to sale other phones, not iPhones.
73 months ago
Very bad news for Apple.
How is that?
Read the thing through, not just the headline, and you'll begin to realize why analysts have a worse reputation that lawyers or politicians!
73 months ago
How is that?
Read the thing through, not just the headline, and you'll begin to realize why analysts have a worse reputation that lawyers or politicians!
Well no carrier will agree to a similar purchase order in the future, that's for sure.
73 months ago
Anyone else expecting to see a huge iPhone advertising push from Verizon?
I'm seeing a buy one, get five free promotion. :D
73 months ago
hahaha! I know several people that went to Verizon to buy an iPhone and came out with a Galaxy because the salesperson told them it was a far superior phone and these people didn't know any better. Maybe Verizon should tell their employees to let people who want to buy an iPhone do just that with no questions asked.
So this is Apple's argument of sales vs sold.
I guess it's not all the Android phones sitting in the back shelves. Seems like an awful lot of iphones are sitting in stock rooms gathering dust.
Sales vs Sold my ass!
73 months ago
And the geniuses keep training to push their employees to sell non iPhones....
I wonder why that is? :confused:
Could it be that people actually WANT something other than the iPhone? No, that couldn't be it! It must be all those Verizon reps that push non-iPhones to the gullible customers! Yeah, that's it!
You guys are like a broken record. Yes, I have the iPhone 5 (on AT&T) and I do like it very much, but you all that stick your heads in the sand and pretend Apple hasn't fallen behind are deluding yourselves. If Apple, and in turn Verizon, want to turn numbers like this around, they've got to realize that one phone model per calendar year isn't going to cut it. Apple has to get serious once again and start bringing innovation (there's that word again) back to the table.
Whether you or Apple want to admit it, consumers WANT bigger screens (and not the pathetic 4" screen the iPhone 5 brought to market that was so revolutionary :rolleyes:). They want more freedom to make their phones THEIRS (and not just by changing the wallpaper behind a grid of icons).
Say what you want, but I firmly believe if Apple brings the 5S out come September...and it's just a rehash of the 5 with a few new "revolutionary" bells and whistles (that Android phones have had for a couple of years now), you're going to start to see the slide quicken. They have to wake up and realize the Jobs Model doesn't work anymore. Google/Android and the OEMs that use it have brought their full weight to bare on Apple and have changed the way the industry (and consumers) work and what they want. Apple had better realize this soon, because folks, Steve Jobs ain't walking through that door to save Apple again.
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