Apple Investors' Recurring Reality

It's a phrase companies love to highlight in press releases, conference calls and earnings reports. It's the type of revenue that -- unlike a flighty girlfriend -- tells investors, "You're safe with me; I'm not going anywhere."

No wonder then that Apple (Nasdaq: AAPL  ) wants a small slice of the ongoing revenue stream from its iPhone carrier partners. Rumors have already been widely circulated that AT&T (NYSE: T  ) gave Apple a sizable cut of the ongoing iPhone service revenue it earns. Now a story in the Financial Times has sources disclosing that a group of European carriers, including Deutsche Telekom's (NYSE: DT  ) T-Mobile, will give Apple a 10% cut of its ongoing revenue in return for rights to launch the device. Europe's largest wireless provider, Vodafone (NYSE: VOD  ) , apparently bristled at the terms and has opted not to "pay to play."

The fact that carriers are willing to share their coveted cash flow with a device manufacturer is seen as a radical departure from the norm. Even venerated top handset manufacturers like Nokia (NYSE: NOK  ) and not-so-venerated-at-the-moment Motorola (NYSE: MOT  ) don't earn ongoing revenue from carriers as customers talk, play games, or download music to their devices. So does this shift in power ushered in by Apple mean that the mighty Mo' now has leverage to ask for recurring revenue from its next RAZR?

No, not likely. While Apple's ability to negotiate a piece of carriers' revenue streams is surprising, it's not completely unprecedented. Research In Motion (NYSE: RIMM  ) also earns revenue from ongoing service plans tied to its BlackBerry device. The difference between RIM and device companies like Nokia is that RIM plays a part in the service by hosting and routing the email service through its servers. Apple likely was able to convince carrier partners that it brings more to the table with increased media use -- and maybe even over-the-air iTunes sales in the near future -- so the carriers aren't getting a bad deal either.

Considering that iPhone users tend to be big spenders -- with montly average revenue per user sometimes exceeding $100 -- giving even a small revenue cut to Apple would be a boon. If Apple can sell 10 million iPhones by next year, as CEO Steve Jobs wants, the high-margin recurring revenue could grow to make a noticeable impact on Apple's bottom line. No wonder then that Apple's stock jumped on the news, as investors sure like hearing this song.

For more Foolish phone fun:

Fool contributor Dave Mock jumps when he hears songs too. He owns shares of Motorola. He is the author of The Qualcomm Equation. Vodafone is an Inside Value recommendation. The Fool's disclosure policy is a recurring policy that stays by your side the whole way.


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