Apple Inc. (AAPL) May Receive $12B from Verizon: Nomura InsightVW Staff
Via Stuart Jeffrey of Nomura…. Verizon Communications Inc. (NYSE:VZ) (Verizon is covered by Mike McCormack) recently disclosed in an SEC filing that it has minimum purchase commitments for handsets and peripherals, equipment, software, programming and network services, and marketing activities of $24.7bn. We believe that nearly all of this relates to Apple’s iPhone purchase commitments, as total purchase commitments totaled just a few hundred million dollars prior to Verizon Wireless ranging the iPhone.
Verizon Communications Inc. (NYSE:VZ)’s disclosure raises a number of interesting issues:
- Apple Inc. (NASDAQ:AAPL)’s contract with Verizon Wireless appears to end in 2013 as $23.5bn of $24.7bn of total purchase commitments are due in 2013.
- Verizon Wireless looks as though it will have an outstanding liability to Apple of up to $12bn, equivalent to 19m iPhones at Apple’s 2Q13 iPhone ASP of $613.
This is based on Verizon selling 18m iPhones in 2013 (we estimate 7.2m were sold in H1 and that H2 sales jump to 10.8m on new iPhone launches and 4S buyers becoming eligible for upgrades).
Key elements of Apple Inc. (NASDAQ:AAPL)’s iPhone business model at risk
We believe that the terms of Apple Inc. (NASDAQ:AAPL)’s and Verizon Communications Inc. (NYSE:VZ)’s contract may mitigate some of the $12bn potential liability. Even so, the obligation seems likely to prove material given the starting size. We believe that this situation puts Apple in an interesting position. Minimum purchase commitments have, we believe, become a core part of Apple’s iPhone business model.
For example, for Sprint Nextel Corporation (NYSE:S) to range the iPhone the operator disclosed that it had to sign a minimum purchase commitment with Apple Inc. (NASDAQ:AAPL) (estimated at 30m devices or $20bn by the Wall Street Journal), the size of which weighed on Sprint’s share price when announced. In addition, we believe that these minimum terms are the reason China Mobile and NTT DoCoMo are yet to sign a contract with Apple.
iPhone marketing support may fall if Apple Inc. NASDAQ:AAPL) waives obligation
If Apple Inc. (NASDAQ:AAPL) does not impose terms on Verizon Wireless, then other operators may believe that they too will not be punished by missing their commitments. The result of this could be that operators reduce their marketing support for the iPhone, in the hope of steering demand to Android phones that incur lower subsidies.
Hard to see Apple hurt a key customer
It is hard to imagine, however, that Apple Inc. (NASDAQ:AAPL) would really force its second biggest customer to buy 19m phones that it does not want and that would saturate the market. If other carriers face the same shortfalls – which seems possible given the lower-than-expected sales of the iPhone 5 – then it is hard to imagine Apple forcing all operators globally to meet their commitments in one go.
Position weakened as contract ends in 2013
Apple Inc. (NASDAQ:AAPL)’s position is weakened, in our view, by the apparent ending of its existing contract with Verizon Communications Inc. (NYSE:VZ) at the end of 2013. If both parties dig their heels in, then Verizon Wireless could react by ordering 19m iPhones in Q4, not sign a contract renewal with Apple, and still cover much of its requirements for 2014. We doubt that Verizon Wireless would want to do this, but it might be better than paying out $12bn for phones it cannot sell.
It strikes us that there is no obviously elegant way for Apple Inc. (NASDAQ:AAPL) to get around this problem. The end result, we suspect, is that iPhone market share may come under greater pressure when its competitive position is relatively weak – as is arguably the case in 2013.
T-Mobile Jump – could drive 6-month upgrades
Yesterday, T-Mobile USA, Inc. (TMUS) announced that its customers could upgrade to a new phone twice a year as part of its new JUMP! offering. To take advantage of this offering, consumers need to pay $146 for each new phone and an additional monthly fee of $10 to take advantage of the offer.
If this offering proves popular, then T-Mobile customers could end up upgrading much faster than before. This could accelerate replacement cycles across the US market and generate upside to our current forecast of 3% smartphone revenue growth for the next 3 years.
T-Mobile USA, Inc. (TMUS) still only has a roughly 14% market share of the post-paid market, and so the market wide impact is likely to prove limited unless T-Mobile gains a lot of share or other operators copy JUMP!
While encouraging for Apple Inc. (NASDAQ:AAPL), Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) (covered by CW Chung) and other smartphone vendors, we note that the actual financial impact of JUMP! for consumers is not much different to an AT&T Inc. (NYSE:T) or Verizon Wireless buying a new phone at full price every 12 months and selling their old phone on eBay. T-Mobile’s offering is easier for the consumer, though, and so may see some success.
While noting the potential upside for smartphone sales from the JUMP! offering, we want to wait and gauge its success before revising US smartphone estimates.