Russian cellcos want new deal as iPhone struggles in new markets

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Russian cellcos want new deal as iPhone struggles in new markets

By CAROLINE GABRIEL

Published: 24 March, 2009

READ MORE: iPhone | Russia

As western iPhone carriers gear up for widely anticipated new models in June or July, the iconic handset is struggling to penetrate the key growth markets for mobile services - the so-called BRIC companies (Brazil, Russia, India, China). Apple may be close to a deal with China Unicom for the 3G iPhone, after three rounds of failed talks with China Mobile; but it is struggling in Russia and India, while one of its Brazilian partners, Telefonica joint venture Vivo, is said to be negotiating for a Palm Pre exclusive.

There are two main problems for the iPhone in emerging markets. One is the operator model - countries like India rely heavily on prepaid rather than contract sales, and carrier subsidies are rare, while the iPhone has succeeded on the back of cellcos offering heavily underwritten devices in return for hefty contracts. Without subsidies, the iPhone looks hugely expensive in these new markets, at $500 or more. The second problem is the prevalence of grey market sales, which has been particularly problematic in China and Russia.

Russia's big three cellcos are reported in the country's business daily Kommersant to be demanding a renegotiation of their non-exclusive deals to carry the 3G iPhone, which went on sale last fall. Market leader MTS said it expected to sell one million units by October 2011, while Megafon and VimpelCom agreed with Apple to sell 1.5m between them. But the last quarter of 2008 saw only 230,000 iPhones sold in Russia, and sales have fallen by 30%-40% since the start of 2009, while the ruble has lost 30% of its value. All the cellcos now want to cut their unit sales obligations and the price they pay for the iPhone. Analysts say about 45% of the iPhones imported last October remain unsold.

MTS president Mikhail Shamolin told The Wall Street Journal this week that the iPhone was "an expensive drug". He referred to last year's talks with Apple over the handset as like "the negotiations of a junkie and a narcotics salesman", because of the pent-up demand for the device, but said the price tags of between $400 and $800 had resulted in low sales, especially with the drying up of consumer credit. However, he estimates about 500,000 iPhones are operational in Russia, having been obtained on the grey market at lower prices.

Meanwhile, Canadian operator Fido, part of Rogers, has followed other iPhone partners in running down stocks of iPhones, apparently in readiness for a new model around midyear. Rogers' low cost subsidiary is reportedly planning to discontinue sales of the 16Gb iPhone model altogether. Pundits are divided over whether the new iPhone will be a superphone or a cut-down 'Nano' - last week, Mike Abramsky of RBC Capital Markets said he expects Apple to release a $99 model in June or July, plus upgraded versions of the current 3G phone with more memory and HSPA support. This could improve Apple's fortunes in the BRIC regions.