iPhone Deal May Leave Verizon on the Hook for $14B

Verizon may owe Apple between US$12 billion and $14 billion for not selling as many iPhones as it promised to this year, according to two analyst reports revealed Thursday.

Verizon committed to buy $23.5 billion worth of iPhones this year — a number that is more than twice what it sold in 2012 — leading to a potential shortfall of $12 billion to $14 billion, warned Craig Moffett of Moffett Research.

Stuart Jeffrey of Nomura, meanwhile, estimates Verizon sold 7.2 million units for the first six months of 2013 and predicts it will sell 10.8 million over the remaining six months, leaving it with roughly 19 million units unsold. That amounts to an outstanding bill of some $12 billion.

Bottom line: Verizon could owe Apple more than $10 billion for unsold phones this year.

Many Scenarios

There are a number of ways this could play out, speculated Nomura’s Jeffrey.

At first blush, it is unlikely that Apple would hold Verizon accountable for this revenue down to the last penny.

“That would upset their second biggest customer and would result in very weak orders for 2014,” Jeffrey told the E-Commerce Times.

Verizon Wireless doesn’t yet have a contract for next year, so “forcing Verizon to buy these phones in that way would not be good for Apple in the long run,” he said.

On the other hand, if Verizon gets a break, then other carriers — possibly burdened by similar onerous agreements — could relax their efforts to push the iPhone, he continued.

‘Onerous Terms’

Contracts with the carriers are closely guarded, which makes such speculation difficult. It is known, though, that Sprint has a similar contract with Apple, Jeffrey pointed out.

“It could be that other operators have less onerous terms,” he noted. “What we do know is that many carriers have complained about the onerous terms that Apple has set.”

It is also difficult to analyze how this miscalculation about iPhone demand happened at Verizon and Apple.

“Frankly, it is hard to see how Verizon could have done better promoting the iPhone,” Jeffrey said.

Maybe customers were more conservative in extending their replacement cycles, for example.

‘More Scope to Set a Compelling Price’

In any case, the big question now is what will happen with Verizon’s next contract, Jeffrey noted.

“Presumably the missed orders will be reflected in the new contract,” he suggested. “Maybe Apple will give Verizon more scope to set a compelling price and earn a decent margin.”

Still, Apple could be damaged if there’s a sense it let Verizon get away too easily.

Verizon Wireless declined to comment for this article. Apple and Moffett did not respond to our requests to comment for this story.

‘I Am a Bit Skeptical’

Another moving part to this puzzle to contemplate is this: the exact depth of Verizon’s deficit. It could be that the two analysts have overshot the mark in their calculations, given the secrecy of these numbers.

That, at least, is the opinion of James Brehm, senior strategist and consultant at Compass Intelligence.

“I am a bit skeptical that they had all of the data necessary to come to their conclusions,” Brehm said.

If there is a gap, “I don’t believe it is that large of a number,” he told the E-Commerce Times.

‘That Never Happened’

That said, however, it is not difficult to see how Verizon and Apple could have miscalculated demand, Brehm suggested.

“The iPhone has clearly changed smartphone economics,” Brehm pointed out. “It has generated tremendous demand and prompted other device makers to be innovative as well.”

Guessing at specific numbers, however, has been a crapshoot, he added.

“Remember when Verizon first got the iPhone? It was a tremendous deal and everyone believed that AT&T was as good as dead, but that never happened,” Brehm recounted.

Bottom line: Trends are easy to grasp in the smartphone space, he concluded, but competitive data such as sales and contract terms? Much less so.