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Understanding the Impact of Slowing Apple iPhone 7 Sales on Verizon

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Demand has decreased in China

DigiTimes stated that Apple (AAPL) is scaling back orders for the iPhone since sales for its recently launched iPhone 7 and iPhone 7 Plus have been falling. DigiTimes further stated that demand for the iPhone in China and other markets has fallen significantly. Supply chain manufacturers expect shipments in the first six months of 2017 to fall by 5 million units, as compared to the last six months of 2016.

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IDC (International Data Corporation) predicts that iPhone shipments will be 206.1 million in 2016, which would be a YoY (year-over-year) fall of 11.0%. That said, iPhone shipments are estimated to reach 243.6 million in 2020, and Apple’s market share is expected to fall marginally from 14.3% in 2016 to 14.2% in 2020. While overall smartphone shipments are expected to rise 0.60% YoY, iPhone shipments are still expected to have fallen 11.0% in 2016.

Verizon’s wireless equipment revenue in 3Q16

The Wireless segment of Verizon Communications (VZ) consists of Service and Equipment sub-segments. While the service sub-segment deals with revenues associated with wireless plans, the equipment sub-segment deals with revenues associated with the sale of smartphones and tablets. Equipment revenues in Verizon’s Wireless segment fell ~3.9% YoY to reach ~$4.1 billion in 3Q16, as compared to ~$4.3 billion in 3Q15.

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The main reason for this decline was lower smartphone sales during the quarter. The device upgrade rate fell to 6.3% of the retail postpaid base from 7.0% one year previously. This rate was impacted by the total recall of the Samsung (SSNLF) Galaxy Note 7 due to exploding batteries and heavy promotional activity by competitors. Now, with iPhone 7 sales coming under pressure, equipment revenues for Verizon could continue to fall YoY.

Meanwhile, smaller rivals T-Mobile (TMUS) and Sprint (S) have stepped up competition for subscribers with aggressive pricing techniques. Sprint, for instance, is promising subscribers who defect to its network that they will only have to pay half the price of the plan they currently have with their provider. Sprint is paying up to $650 in switching costs per line for defectors.

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