Verizon (VZ) activated 8.8 million smartphones during its fourth quarter, down 10% year-over-year. While that may seem like a disappointing number, Apple (AAPL) bulls have been pinning their hopes on a 2014 that turns out much better than 2013. China Mobile (CHL) may just be the key to that.
Verizon had been reporting quarterly activation numbers for the iPhone each of the last several quarters, but not anymore, much to the chagrin of media, analysts and Apple-watchers everywhere. However, with Verizon activating 8.8 million smartphones during the quarter, and assuming Apple kept its 62% market share of activations, it's possible that Verizon activated roughly 5.4 million iPhones during the holiday quarter, Apple's most important.
For the third quarter of 2013, Verizon activated 3.89 million iPhones.
AT&T (T) reports quarterly results on Jan. 28, but AT&T has become less important as it relates to Apple's future compared to Verizon, given the abundance of domestic cellular providers carrying Apple products.
While the United States is still Apple's largest market by revenue, even numbers from Verizon and AT&T are becoming less important as Apple continues to expand its global carrier list. In the fiscal fourth quarter of 2013, Apple generated $13.94 billion in revenue from the United States, up 1% year-over-year, but down 3% sequentially.
Meanwhile, Apple is getting a substantial boost from Asia, and China in particular, thanks to their enormous audience, including China Mobile's 767.2 million subscribers. In the fiscal fourth quarter, Apple generated $5.73 billion in revenue, up 6% year-over-year.
Cantor Fitzgerald analyst Brian White, who rates Apple "buy" with a $777 price target, notes that the total number of 3G subscribers in China rose by 79% to 417.3 million in 2013. "Given the official launch of the iPhone with China Mobile on Friday (1/17), the interest level around the mobile Internet build out in China has increased more recently, and we believe Apple is one of the best positioned mobile device companies to benefit from this growth opportunity," White wrote in a note.
China Mobile accounts for a large portion of those 417.3 million 3G subscribers, with 191.6 million users. Among the other major 3G companies, China Unicom (CHU) ended the year with 122.6 million subscribers, and China Telecom (CHA) had 103.1 million, according to White.
In an interview with CNBC last week, China Mobile announced there were 1.2 million pre-orders of the iPhone.
Despite steep iPhone prices in China due to tariffs, demand is still exceptionally high. A 16GB iPhone 5s is priced at 5,288 yuan ($874) according to China Mobile, with the 64GB model costing consumers 6,888 yuan ($1,139). Apple's iPhone 5c will have a price set at 4,488 yuan for the 16GB model.
A downtrodden year?
2013 was by and large a downtrodden year for Apple, as the company's share price came under severe pressure. This forced Apple CEO Tim Cook to discuss matters such as share buybacks with activist investor Carl Icahn all while hearing the constant criticism Apple could no longer innovate. It's been three years since Apple has introduced a new product, having launched the iPad in 2010 under former CEO Steve Jobs.
The late 2013 introduction of products such as the iPhone 5s and iPad Air showed consumers Apple can still innovate, with new features such as TouchID, A7 and M7 chips, which were engineering feats and marvels unto themselves. Apple clearly heard the cries it can no longer innovate, when VP of Marketing Phil Schiller introduced the new Mac Pro at Apple's Worldwide Developer Conference in June. "Can't innovate anymore, my ass," Schiller said during the presentation.
As Apple moves into other product categories (health and fitness or television), the telecoms, including Verizon and China Mobile, are going to play an increasing role in Apple's future. When Cook was interviewed last week discussing the iPhone coming to China Mobile, he said "Today is just the beginning of China Mobile and Apple coming together."
Products such as the iWatch, iTV, and others are likely to use Long Term Evolution (LTE) data connections, and may even wind up using 5G in the future, which is a new Internet connection that was introduced at the International Consumer Electronics Show last year. No longer are we likely to see Apple products not having multiple options, including Wi-Fi and LTE options.
Devices with LTE connectivity are thought to generate higher margins for Apple, despite having a higher bill for materials. For the fiscal fourth quarter, Apple's overall gross margins were 37%, as Apple introduced both the iPhone 5s and 5c, and likely started ramping up production of the new iPads during the quarter.
As Apple continues to evolve its product line to include more smart devices, moving away from the iPod and potentially even Macs, the telecoms are going to play an even bigger part of the world's largest tech company's future. With Verizon's status in the United States and China Mobile's in China, it's clear Apple will be relying on these two partners more than ever.
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