Will Apple Inc. (AAPL) Really Force Verizon Communications Inc. (VZ) to Cough up $14 Billion?

Page 1 of 2

Verizon Communications Inc. (NYSE:VZ)Things could get ugly soon between Verizon Communications Inc. (NYSE:VZ) and Apple Inc. (NASDAQ:AAPL). In the past, the partnership between the companies was fruitful, boosting Verizon Communications Inc. (NYSE:VZ)’s annual revenue 7.5% over the past two years. However, between 2011 and 2013, Google’s Android handsets gained substantial ground, and Apple Inc. (NASDAQ:AAPL)’s dominance of the smartphone market started to slip.

Therein lies the problem. Through a security filing from Vodafone Group Plc (ADR) (NASDAQ:VOD), which owns 45% of Verizon Communications Inc. (NYSE:VZ), it was revealed that Verizon Communications Inc. (NYSE:VZ) has $23.5 billion in purchase commitments with Apple Inc. (NASDAQ:AAPL) due later this year. A purchase commitment is a promise that a telecom company makes to a handset manufacturer for a guaranteed number of units sold over a given length of time. In this particular case, Verizon Communications Inc. (NYSE:VZ) promised to sell $23.5 billion in iPhones by the end of 2013, or be forced to pay the difference by purchasing the rest of the phones.

Biting off more than it can chew

However, Verizon Communications Inc. (NYSE:VZ) was unable to sell even half that amount in 2012, which indicates that the company stands no chance of hitting that lofty sales target this year. To date, Apple Inc. (NASDAQ:AAPL) has sold over 500 million devices, with 40% of those sales occurring in 2012. It appears that Verizon severely overestimated the growth potential of the iPhone in 2013, and believed that it could actually double its 2012 sales figures this year.

Unfortunately, recent data from IDC reveals that Google Inc (NASDAQ:GOOG)‘s Android first quarter global market share rose year-on-year from 59.1% to 75.0%, whereas Apple Inc. (NASDAQ:AAPL) iOS’ share dropped from 23% to 17.3%. This means that Verizon could soon be left holding the bag when its purchase commitments come due – by $12 billion to $14 billion, according to analysts at Moffett Research. A payment that massive could reduce Verizon’s annual earnings by $4 to $5 per share, and force the company to consider backing Android handset manufacturers, like Samsung, instead.

The billion dollar question

That leads us to the billion dollar question on Verizon shareholders’ minds: will Apple Inc. (NASDAQ:AAPL) actually force Verizon to buy up that many iPhones if it fails to meet its agreed sales targets? Or will Apple renegotiate the terms with Verizon later this year, as to not alienate an important ally in the United States?

However, I believe that Apple will likely force Verizon to pay at least most of the purchase commitment, to show its other telecom partners, such as Leap Wireless International, Inc. (NASDAQ:LEAP) (recently acquired by AT&T Inc. (NYSE:T)) and Sprint Nextel Corporation (NYSE:S) that it intends to enforce sales shortfalls. Leap Wireless International, Inc. (NASDAQ:LEAP) also signed a three-year purchase commitment with Apple that it could also fall short off. Leap estimates that the shortfall could cost the company $100 million if Apple demanded a payment for the entire year’s iPhone orders. However, Sprint Nextel Corporation (NYSE:S) made a much more conservative deal with Apple, promising to sell at least $15.5 billion of iPhones between 2011 and 2015, a much more conservative target that the company expects to meet.

Foreign companies smartly refuse to deal with Apple

These terms are incredibly tilted in Apple’s favor. Critics claim that these deals are made at no risk to Apple, with telecom companies shouldering all the risk and forced to pay dearly if Apple’s products wane in popularity.

Therefore, Asian telecom companies such as Japan’s NTT Docomo Inc (ADR) (NYSE:DCM) and China Mobile Ltd. (ADR) (NYSE:CHL) have flatly refused to agree to sign any purchase commitments with Apple. Asian manufacturers clearly understand that Apple needs them more than they need Apple, since handsets from Samsung, Sony Corporation (ADR) (NYSE:SNE) and other Android manufacturers have been enough to carry their top and bottom line growth over the past few years.

NTT Docomo Inc (ADR) (NYSE:DCM) is Japan’s largest telecom company, but it has notably avoided carrying the iPhone for that reason. Apple also refused to allow NTT Docomo to pre-install its own apps, which competing Android manufacturers have allowed the company to do. Despite losing some customers to iPhone-carrying competitors KDDI and Softbank due to the lack of the iPhone, NTT Docomo’s top and bottom line growth haven’t suffered terribly. Last quarter, NTT Docomo’s earnings rose 14.2% as its revenue climbed 3.1%. By comparison, Verizon’s earnings and revenue climbed 15.8% and 4.2%, respectively.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Jobs that May Exist in the Future

The Absolute Best States to Shop in the US

5 Best States for Golf Adventures

Top 15 Places To Visit Before You Die

10 Most Expensive Smartphones in the World

10 States with Lowest Physician Density

10 Top Reasons For Getting Fired

The 3 Best States to Start an LLC

10 Jobs That Allow You to Travel

7 High-Paying Jobs You Can Do From Home

12 Best Cities to Shop in USA

10 Best States To Practice Medicine

The 10 Best States to Have a Business

The 12 Most Expensive Apple (AAPL) Apps in the Market

The 10 Richest Billionaires in the World

10 Biggest Kickstarter Failures

The 10 Best Places to Work At

The Top 10 of Google Inc (GOOGL)’s Most Expensive Acquisitions

13 Best Cities to Visit in South America

10 Most Expensive Works of Art of All Time

The 10 Richest Banks in the World

The 10 Best-Paying Jobs in America (2014)

7 Most Expensive Foods in the World

The World’s Top 10 Earning Authors

Five Wicked and Very Expensive Items (and Other “Stuff”) Sold on eBay

10 Biggest Celebrity Bankruptcies

The Top 10 Highest Paid CEOs in 2014

The 10 Most Expensive Real Estate Cities in America

10 Most Expensive States To Live In America

The 10 Best Airlines in the World

The 10 Best-Selling Cars in 2014

The 10 Best Industries to Invest In

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!