John Paczkowski

Recent Posts by John Paczkowski

How Will Apple Handle Verizon’s iPhone Shortfall?

Verizon iPhoneVerizon has an iPhone problem and it’s not going away.

Reporting second-quarter earnings Thursday, Verizon said that more than half of the 7.5 million smartphones it activated during the period were iPhones. That’s a big number and good news for the carrier. But sadly it’s not nearly good enough to significantly pare down its ballooning iPhone purchase commitment to Apple.

Verizon must sell $23.5 billion worth of iPhones this year to satisfy the agreement it made with Apple in 2010, according to an analysis of SEC filings by former Sanford C. Bernstein & Co. analyst Craig Moffett. And at the rate it’s currently going, it has very little chance of doing that. To date, Verizon’s reported iPhone sales have lagged so far behind its commitments that Moffett figures the company is likely headed toward a shortfall of more than $12 billion.

And that’s a problem not just for Verizon, but for Apple as well. Obviously, the company would rather not advertise that a high-profile carrier like Verizon has fallen so far short of its purchase obligations for one of its flagship products. But there’s far too much money at stake here for it to simply grant Verizon amnesty. It’s quite the conundrum for Apple — more so now that its shareholders and other carrier partners are aware of it. Apple’s negotiations with Verizon will likely be materially different simply because Verizon’s iPhone shortfall is no longer a secret.

“Apple will undoubtedly get pressure from its shareholders to realize the value that it is due,” Moffett told AllThingsD. “And other carriers around the world will be watching what happens with Verizon to see whether their own contracts with Apple are enforceable. All that puts more pressure on Apple than would otherwise be the case.”

Will that be impetus enough for Apple to take a hard line against Verizon when the time comes? Will it enforce its contract and mete out a penalty to the No. 1 U.S. carrier by subscribers? And what tack will Verizon take here? Lower-than-expected iPhone sales figures weren’t what Verizon was expecting when it made that multibillion-dollar commitment to get Apple’s smartphone on its network. The carrier could use that disparity to win some sort of concession from Apple — smaller purchase commitments for its next contract or perhaps even lower up-front prices.

But beyond that? Hard to say, as Moffett — who has begun referring to the issue as the “Heisenberg Principle of iPhone Uncertainty” — notes.

“I have no way of guessing what might happen at the end of the contract,” he said. “It seems unlikely that Apple would force Verizon to simply cut them a check. On the other hand, the words ‘purchase commitments’ are Verizon’s, not mine, and it seems equally unlikely that Apple would simply forgive a shortfall of that magnitude.”

Verizon did not respond to a request for comment on the matter; Apple declined to provide one.

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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik