An Ignoble Experiment

2. Analysts: Samsung, Apple keep smartphone grip, but lower-end rivals are nipping

Apple (NASDAQ:AAPL) said it sold a record 51 million iPhones during its most recent quarter, which covered the critical holiday shopping season. Apple's iPhone sales figure was slightly lower than what an average of analysts expected. Apple also reported quarterly revenue of $57.6 billion and quarterly net profit of $13.1 billion.

Click here for quarterly iPhone and iPad sales figures since 2007.

During the company's quarterly conference call, Apple CFO Peter Oppenheimer pointed specifically to solid iPhone sales in the United States, Japan and China. In North America, Apple CEO Tim Cook said the company's iPhone sales were slightly lessened by wireless carriers' stricter 24-month upgrade policies, though he didn't name any carriers or provide much details. He also said Apple couldn't meet demand for the iPhone 5s in North America until the end of its most recent quarter. In Japan, DoCoMo late last year began selling Apple's iPhone; Apple said the iPhone now commands 69 percent of the smartphone market in that country. In China, China Mobile earlier this month began selling Apple's iPhones; China Mobile is the world's largest wireless carrier with around 760 million subscribers. "China is an incredibly important market for iPhone," Oppenheimer said.

"Last week was the best week we've ever had for activations in China," Cook said, noting that Apple is currently selling iPhones in 16 cities with China Mobile, a number that will grow to 300 by the end of the year.

Apple executives also noted that demand for the iPhone 5s--instead of the iPhone 5c--outstripped the company's expectations during the most recent quarter. Cook attributed the demand for the iPhone 5s to interest in the gadget's fingerprint scanner.

According to the Wall Street Journal, analysts on average predicted Apple would sell around 55 million iPhones during its fiscal 2014 first quarter, which ended Dec. 28, 2013.

In its previous quarter, Apple sold 33.8 million iPhones and reported quarterly revenue of $37.5 billion on a quarterly net profit of $7.5 billion. A year ago, Apple sold 47.8 million iPhones, with quarterly revenue of $54.5 billion and a quarterly net profit of $13.1 billion.

In the coming quarter, Apple said it expects a notable decline in revenue, to between $42 billion and $44 billion.

As for its iPad business, Apple reported selling 26 million units in its most recent quarter, which the company said was also an all-time quarterly record.

Interestingly, Apple said it now counts a total of 1 million iOS apps, which the company said generated $2 billion in sales during the company's most recent quarter. Apple also said it now counts 130,000 apps made specifically for the Chinese market. Apple executives pointed out that the company's refreshed iOS 7 is now running on 80 percent of the company's mobile devices--the company specifically pointed out that the newest version of Android is only running on a single-digit percentage of Android phones.

Apple is widely expected to release new products sometime in the future, including a possible "iWatch" smart watch and iPhones with bigger screens. Those gadgets could also help propel Apple's earnings in the coming quarters, if they are indeed released. During the company's conference call, Cook was questioned whether Apple has new products up its sleeve. Though he didn't answer directly, he said: "I think our customers are going to love what we're going to do." Cook also confirmed that Apple will release new products in new categories sometime in 2014.

Moreover, Apple has been rumored to be preparing some type of mobile payments solution, which could leverage the new fingerprint scanner that Apple released with the iPhone 5s. Apple's Cook was questioned about the company's thinking on mobile payments, though he declined to discuss possible forthcoming products. "The mobile payments industry in general is one that we've been intrigued with," Cook said. "But we're not limiting ourselves to that." He also said that "it's a big opportunity on the (iOS) platform."

For more:
- see this release
- see this Wall Street Journal article (sub. req.)
- see this WSJ article (sub. req.)
- see this Bloomberg article
- see this Reuters article

Special Report: Wireless in the fourth quarter of 2013

Read more about: quarterly earnings, iPhone 5C
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By Phil Goldstein

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3. Sprint, T-Mobile, CCA and others again urge restricting Verizon, AT&T in 600 MHz auctions

Samsung Electronics and Apple (NASDAQ:AAPL) maintained their stranglehold on the global smartphone market in the fourth quarter and for all of 2013, according to multiple research firms, but lower-end rivals are gaining market share at a faster pace. That may mean that over time the market for high-end, high-margin phones will erode, as average selling prices for smartphones worldwide fall.

Click here for a bigger version of this chart.

Additionally, depending upon which research firm is consulted, handset makers around the globe either shipped just over 1 billion smartphones in 2013 for the first time or slightly under that mark.

According to research firm IDC, handset vendors shipped 1.004 billion smartphones in 2013, up 38.4 percent from the 725.3 million units IDC recorded in 2012. Smartphones accounted for 55.1 percent of all mobile phone shipments in 2013, up from the 41.7 percent of all handset shipments in 2012, IDC said.

However, research firm Strategy Analytics said 990 million smartphones were shipped in 2013 and Juniper Research reported 980 million smartphone shipments. The main difference in the tallies between IDC and Strategy Analytics comes from the higher total IDC has for the "other" category, which includes companies outside of the top five vendors. That list includes notable vendors such as Nokia (NYSE:NOK), BlackBerry (NASDAQ:BBRY), HTC and Sony, but also smaller Chinese companies including TCL, Xiaomi and Yulong. IDC had 394.9 million units in the "other" category while Strategy Analytics only had 373.3 million.

For the fourth quarter and full-year 2013, both IDC and Strategy Analytics were in alignment on their rankings of the top-five smartphone vendors. In the fourth quarter, Samsung led the way, followed by Apple, Huawei, Lenovo and LG Electronics. For the full-year numbers, that order held as well, except that LG came in at No. 4 and Lenovo at No. 5.

A larger trend underway, according to IDC, is that the likes of Huawei, LG and Lenovo are gaining share at the expense of Samsung and Apple. Samsung and Apple saw their global smartphone market share dip to a combined 46.6 percent in 2013, down from 49 percent in 2012. Meanwhile, Huawei, LG and Lenovo saw their market share grow to a combined 14.2 percent in 2013 from 10.9 percent in 2012. Strategy Analytics observed a similar decline in the Samsung/Apple market share, but also reported market share declined for Huawei, LG and Lenovo.

"Samsung and Apple together accounted for almost half of all smartphones shipped worldwide in 2013. Large marketing budgets, extensive distribution channels and attractive product portfolios have enabled Samsung and Apple to maintain their grip on the smartphone industry," Strategy Analytics noted. "However, there is clearly now more competition coming from the second-tier smartphone brands. Huawei, LG and Lenovo each grew their smartphone shipments around two times faster than the global industry average and captured a combined 14 percent market share. Huawei is expanding swiftly in Europe, while LG's Optimus range is proving popular in Latin America, and Lenovo's Android models are selling at competitive price-points across China. Samsung and Apple will need to fight hard to hold off these and other hungry challengers during 2014."

The trend away from higher-margin phones has been presaged by numerous research firms. In November, IDC forecasted the average smartphone will cost just $265 by 2017. While IDC expects the smartphones segment to enjoy a compound annual growth rate of 18.4 percent from 2013 to 2017, reaching 1.7 billion units in 2017, growth in the years ahead is likely to come from smartphones with lower ASPs.

In line with that, in April ABI Research forecasted that smartphones costing $250 or less before carrier subsidies will make up 46 percent of all global smartphone shipments by 2018, up from 28 percent in 2012. That could open up new sales opportunities in emerging markets, but likely will mean lower profits and margins for handset makers.

For more:
- see this IDC release
- see this Strategy Analytics release
- see this Juniper research release
- see this Engadget article
- see this Quartz article
- see this Reuters article
- see this Bloomberg article

Related Articles:
Apple sells record 51M iPhones, slightly below expectations
Samsung reports flat mobile profits in Q4
LG posts record 13.2M smartphone sales in Q4, swings to loss
IDC: Smartphones to cost an average of just $265 by 2017
ABI: Smartphones under $250 to make up 46% of smartphone shipments by 2018

Read more about: Juniper Research, IDC
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By Phil Goldstein

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4. Verizon, Vodafone shareholders approve $130B deal for Verizon Wireless stake

The start of the 600 MHz broadcast TV spectrum incentive auctions may have been pushed from this year to the middle of 2015, but the fight to define rules that might restrict the ability of Verizon Wireless (NYSE:VZ) and AT&T Mobility (NYSE:T) to acquire airwaves in the auctions rages on. Last week, representatives from Sprint (NYSE:S), T-Mobile US (NYSE:TMUS), U.S. Cellular (NYSE:USM), Dish Network (NASDAQ: DISH) and a wide array of associations and public interest groups met with FCC officials and urged for those restrictions.

Click here for a bigger version of this chart.

Other companies groups that lobbied with Sprint and T-Mobile included C Spire Wireless, the Competitive Carriers Association, the Rural Wireless Association, the New America Foundation, Public Knowledge, the Computer & Communications Industry Association and the Writers Guild of America. They met jointly with legal advisors to the FCC commissioners and Chairman Tom Wheeler.

In the meetings, they pressed for restrictions to be placed on AT&T and Verizon and noted that the two larger carriers "have a powerful economic incentive to acquire the remaining low-band spectrum they do not already control in order to prevent competitors from undercutting them with superior service, pricing, terms, or technology."

"Reasonable spectrum-aggregation limits prevent this outcome and will promote and preserve competition that can reduce prices, increase consumer choice, encourage investment and innovation, and accelerate next generation mobile deployment, especially in rural and historically underserved markets," the companies argued.

AT&T and Verizon have generally pushed against such spectrum aggregation limits, arguing that setting them in place would amount to picking winners and losers in the auction, and will deprive the planned nationwide public safety broadband network FirstNet of needed funding by depressing auction revenues.

Although T-Mobile is seeking FCC approval to acquire lower 700 MHz A Block spectrum from Verizon, it is still arguing for limits. In a presentation the companies and groups made to the FCC officials, they said that "adopting a no-nonsense, ex ante spectrum aggregation limit" will have several benefits, including that it "mitigates the risk of predation to deter market entry; increases auction participation; creates the potential for higher auction revenue; promotes investment and innovation; protects FirstNet funding; enhances consumer choice; drives growth in a critical sector of the U.S. economy; and heightens clarity, certainty and predictability for all carriers."

Verizon, in a separate filing, aggressively pushed back on the notion. On Jan. 23, Kathleen Grillo, senior vice president of federal regulatory affairs at Verizon, met with Matthew Berry, chief of staff to Commissioner Ajit Pai. In the meeting, she urged the FCC to update its spectrum screen to include "all suitable and available spectrum," including the 2.5 GHz Broadband Radio Service and Educational Broadband Service spectrum Sprint is using to deploy LTE.

She also said, according to a Verizon filing, that the FCC should "reject requests to restrict the ability of Verizon and AT&T to participate" in the incentive auctions, "which will reduce auction revenues and risk outright auction failure. Instead, it should adopt rules that encourage the broadest possible participation by broadcasters and wireless carriers alike, in order to maximize the amount of spectrum repurposed for mobile broadband and fund FirstNet and deficit reduction."

For more:
- see this FCC filing
- see this Verizon filing

Related Articles:
T-Mobile buys Verizon's 700 MHz A Block spectrum for $2.4B
Verizon, CCA wrangle over size of licenses for 600 MHz auction
Sprint switches gears, backs FDD rather than TDD plan for 600 MHz auction
Stephenson: AT&T would accept limits to spectrum purchases during incentive auctions
FCC pushing 600 MHz broadcast incentive auction to mid-2015
FCC's Wheeler signals intent to let smaller carriers get more spectrum

By Phil Goldstein

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5. NSA, GCHQ target 'leaky' apps to gather data on smartphone users, according to Snowden leak

As expected, Verizon Communications (NYSE:VZ) and Vodafone shareholders approved an agreement for Verizon to buy Vodafone's 45 percent stake in Verizon Wireless for $130 billion. With the deal sailing toward a closing date next month, attention is now turning to what Verizon plans to do with full control of its lucrative wireless asset and what might change.

As the Wall Street Journal noted, the deal will return a windfall $84 billion, or 71 percent of net proceeds, to Vodafone shareholders, with more than two-thirds of that coming in stock. The deal is the largest single return in corporate history.

The deal is made up of $58.9 billion in cash and $60.2 billion in Verizon stock. In September, Verizon blew past records by selling $49 billion in corporate debt in order to finance the deal. The deal is expected to be completed on Feb. 21, and investors are expected to receive their shares on Feb. 24 and cash on March 4.

The deal was backed by 99.8 percent of Vodafone's shareholders, and Verizon said in a separate statement that "a substantial majority" of its shareholders approved the company's issuance of up to 1.28 billion shares of common stock to Vodafone shareholders.

Now that the deal is all but complete, the wireless and telecommunications worlds are wondering what Verizon will do with Verizon Wireless, which had total wireless revenues of $21.1 billion in the fourth quarter alone, up 5.7 percent year-over-year. The main speculation is that Verizon will expand its video offerings and find more ways to bring its FiOS video content to subscribers via its mobile network.

During the company's fourth-quarter earnings conference call, Verizon Communications CFO Fran Shammo said that "full ownership will also provide access to all the cash flows and give us greater flexibility to develop converged solutions without any integration and due diligence risks."

Shammo did not reveal much more than that but did say this regarding how Verizon might combine its wireless and wireline assets, according to a Seeking Alpha transcript: "I think we're very satisfied with the asset portfolio we have and with the acquisition of Verizon Wireless and only 100 percent of that asset you're going to see us do more things around converged [solutions]. So the wireline assets in my view will actually become more valuable over the longer term here with our footprint."

For more:
- see this Verizon release
- see this WSJ article (sub. req.)
- see this Reuters article

Read more about: Verizon Wireless
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By Phil Goldstein

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