Verizon May Owe Apple $14B Over Slow iPhone Sales
The LA Times reports that Verizon Wireless may end up owing $14 billion to Apple. That's because the company must sell $23.5 billion worth of iPhone units this year to meet a commitment it made with Apple back in 2010. To do this, Verizon must double its iPhone sales of last year. Unfortunately, iPhone sales just aren't all that great thanks to larger, zippier Android phones dominating the market.
"It is likely that Apple would be reluctant to simply ignore these commitments, since many other carriers around the world are probably in a similar situation, and a simple amnesty would set an unwanted precedent," Moffett Research said in a report released this week. "It is therefore unrealistic to think that Apple won’t extract some consideration for renegotiating these shortfalls."
Vodafone, the parent company of Verizon Wireless, reported at the end of 2010 that Verizon had $45 billion in purchase commitments over a three-year period. According to Moffett Research, this commitment is likely to Apple, as the Big Red began selling its first iPhone in 2011.
"Few if any other handset suppliers require purchase commitments of this kind, and, again, it is noteworthy that the total commitment was almost zero until Verizon contracted with Apple for the iPhone for the first time," the report stated.
Nomura analyst Stuart Jeffrey is reportedly saying the same thing, that Verizon is going to owe Apple's $23.5 billion this year as part of its agreement to carry the iPhone. But due to slowing sales of Apple's flagship phone, Verizon may not make enough to cover the $23.5 billion bill. The Big Red has likely sold only 7.2 million units in the first half of 2013, and may sell up to 10.8 million units in the second half. That leaves 19 million units unaccounted for.
The kicker is that Verizon must pay for all iPhone units even if they don't actually sell them, and why Verizon is predicted to owe $12 billion to $14 billion.
"We certainly don’t expect that Verizon will have to write a check to Apple for $12 billion or so to make good on its seemingly inevitable shortfall,” Moffett said in its report. "However, it seems likely that Apple will extract at least some consideration for a contract shortfall of this apparent magnitude."
Forbes speculates that Verizon may have jumped the gun when it signed on to carry the iPhone. AT&T's exclusivity had ended, thus allowing Apple to demand stiff commitments in terms of future volumes that in turn wireless carriers had to guarantee. Thus here's this massive commitment Verizon must honor while Samsung and Android eat away at iPhone sales.
That said, should Verizon be left with the tab when consumers aren't eating iPhones like they were in 2011? The Moffett report stated that other wireless carriers around the world may be experiencing iPhone deficits as well. Analysts project that Apple will report a 22 percent decline in net income to $6.87 billion in the third fiscal quarter.
If anything, Verizon may be forced to pay a percentage of what's owed to Apple in order to continue to sell the iPhone in 2014.