Contracts With Apple Should Blunt Any Carrier Pushback on iPhone Subsidies
The possibility of a decline in carrier subsidies for Apple’s iPhone has been top of mind for investors recently, and partially responsible for the tumultuous few weeks the company’s shares have recently suffered. But is it really cause for concern?
Some argue that it is. BTIG Research analyst Walter Piecyk recently cut his rating on Apple, theorizing that U.S. carriers will soon rein in their iPhone subsidies in an effort to boost their own margins. And were that to happen, a significant contraction in iPhone sales would likely follow.
Question is: Will it happen? According to a new analysis from CLSA, the answer is probably no — at least not for the next 18 to 24 months.
Which is great news for Apple. CLSA figures iPhone subsidies accounted for $19 billion of Apple’s fiscal 2011 revenue. And about 46 percent of that came from North America. So if AT&T, Verizon and Sprint were to push to lower the subsidies they pay to sell the iPhone, Apple could take a revenue hit. Indeed, some observers have estimated that a $100 drop in the iPhone subsidy would trim $7.50 from Apple’s earnings-per-share for fiscal 2013.
But that’s an unlikely scenario.
Why? Because, CLSA argues, the structure of Apple’s carrier agreements will prevent it from occurring.
“We believe these are multiyear agreements which tend to stipulate subsidy policies up front,” CLSA analyst Avi Silver explains. “For the major carriers, we believe these agreements have most favored nation clauses so any offering from Apple to one carrier would have to be offered to the other. During the length of these multiyear agreements, we believe U.S. carriers would need permission from Apple to alter subsidy levels.”
And if that’s the case, they’re obviously going to have a difficult time getting it. More to the point, that hypothetical most-favored-nation clause — if it exists — is going to make it tough to trim iPhone subsidies for a while.
Says Silver, “For AT&T, we do not know when its multiyear agreement expires but Verizon and Sprint are likely locked in for some time. As a result, we think that an outright reduction in subsidies is an unlikely scenario in the U.S. market.”
Apple reports earnings after market close today.