Verizon Wireless (VZ) Could Owe Apple (AAPL) $14 Billion
Verizon Wireless (VZ) and Apple (AAPL) shareholders might be soon facing an interesting dilemma. When Verizon initially inked a multi-year deal with Apple back in 2010, it agreed to iPhone purchase commitments in which it promised that a certain amount of iPhones would be sold annually. Since sales of Apple iPhones and other smartphones have cooled down considerably from three years ago, Verizon could owe Apple up to $14 billion for the sales shortfall.
Under the terms of the deal, Verizon Wireless needed to sell $23.5 billion in iPhones in 2013. In 2012, Verizon sold less than half that number, which means that it is unlikely that Verizon can hit its previously agreed sales target. Daily Chart
Most analysts forecast a 22% year-on-year decline in iPhone sales during the current quarter. As a result, Verizon could face a shortfall between $12 to $14 billion for the year, which under the terms of the agreement, the company would have to pay Apple. If Verizon Wireless is forced to abide by the agreement and pay up, it could dent the company's earnings by $4 to $5 per share. In other words, Verizon bit off far more than it could chew with its initial deal. By comparison, Sprint inked a similar deal for $15.5 billion of iPhones sold, which the company now expects to meet. Analysts believe that Apple won't likely ask Verizon to pay the full $12 to $14 billion for the sales shortfall, and renegotiate the terms of the contract instead. However, Apple is unlikely to let Verizon completely off the hook for weak iPhone sales, since it could set a dangerous precedent for other telecom providers to also miss their sales targets. Apple's byzantine demands for carrying the iPhone have been a major point of contention with other global carriers, such as Japan's NTT Docomo (DCM
) and China Mobile (CHL
). Apple's reason for imposing demands is a deep-rooted fear of carriers promoting Android handsets over iPhones. Despite Apple's adamant position in sticking to its purchase commitments, it's hard to see Apple forcing a key ally to purchase 19 million iPhones that it does not want. Those sales, if crammed down Verizon's throat, would also saturate the market further since Verizon would likely have to unload the handsets at steep discounts. If push comes to shove, Verizon could purchase those 19 million phones and refuse to sign a new contract with Apple - which would be a devastating blow considering that Verizon is the second largest telecom company in the United States. If Verizon doesn't sign again with Apple after this conflict, then it could be huge boon to Samsung, which has been waiting in the wings to chip away further at Apple's 17% global market share. Shares of Verizon have risen 15% over the past year, and is generally regarded as a robust dividend stock, with a 4% quarterly yield. Other News About VZ Verizon Wireless Could Owe Apple $14B
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Published on Jul 15, 2013
By Leo Sun