Francis J. Shammo may hold the key to the revival and long-term success of embattled wireless handset maker Nokia Corp. (NYSE: NOK). Shammo, CFO at Verizon Communications Inc. (NYSE: VZ), isn't very happy with the huge subsidy his company is paying Apple Inc. (Nasdaq: AAPL) for its iPhone and wants to push hard for a third operating system that would help reduce the chokehold Apple iOS and Google Android have on the market.
Don't underestimate Shammo or his counterparts at companies like AT&T, Sprint, and T-Mobile. For the last few years, these companies have been squeezed hard by Apple, which demanded a hefty premium from them before offering them the golden opportunity to sell its iPhone device. The subsidies cost AT&T and Verizon billions of dollars each year, and Sprint only recently agreed to pay about $15 billion to Apple for the same privilege.
Of course, the payoff to the service providers is huge. Smartphones are huge moneymakers for these companies, and even T-Mobile, which does not currently have an agreement with Apple, allows customers to activate jailbroken iPhones on its network. In fact, Verizon continues to dangle tempting carrots in front of customers who still use regular phones. Since these represent about half of all Verizon Wireless subscribers, their conversion to smartphone users (whether Apple iOS or Android) would boost revenue generated per subscriber at Verizon, according to Shammo during a conference call last week to discuss the company's first-quarter results.
"Our smartphone penetration is at 47 percent, which means that there are 53 percent of our phone customers that are still on a basic phone," Shammo tells us. "So we still have a lot of roadway here from a basic to smart upgrade."
Although Shammo likes the sales and subscriber boost Verizon gets from iPhone sales, the company is also smarting from having to pay subsidies in the range of $300 to $400 per each Apple smartphone. Verizon also isn't too happy that it has to pay substantial subsidies (though less) for Android phones and wants to break the duopoly established by the two wireless handset operating systems. Here's how Shammo explained it during the conference call:
Going forward, we will continue to look at opportunities to mitigate the cost of higher equipment subsidies and commissions. We have identified $2 billion of cost saving opportunities for this year, and we are on track to capture these savings. On the Apple iPhone, look, I think as I've said before, we look at every individual handset, we have a broad portfolio. We manage it handset-by-handset and manage our subsidy and again, that's just one aspect of our P&L. This is just a nature of this business that's grown from the beginning of the industry that we subsidize handsets.
I do think though it is important that there is a third ecosystem that's brought into the mix here. And we are fully supportive of that with Microsoft, and as we said that we created the Android platform from beginning. And it is an incredible platform today that we helped to create. And we're looking to do the same thing with a third ecosystem. So that's how I think that we plan to go into the future here.
A third ecosystem? That would be Microsoft Windows OS. And the company that is currently shipping a volume amount of Windows OS phones is Nokia, which rolled out the Lumia last year. So far, Verizon has not adopted the Lumia, but if it does, this will give the device incredible visibility with the service provider's customers. Plus, other service providers will probably follow; Verizon, the No. 1 US telecom company, leads, and others follow.
Suddenly, I am beginning to think the future for Nokia may not be that gloomy after all. But first, it has to give Verizon's Shammo something he can take to analysts and shareholders who have been hinting Apple is feathering its own nest at the service provider's expense. By the way, "carriers are mad as hell" with Apple, as a Wall Street Journal report puts it; but for now, the consumer electronics company holds all the aces. That's why it's working on the alternative -- but does Nokia and Windows OS really fit the bill?