Details of Apple’s Distribution Deal With Russia’s Megafon Revealed

Source: Apple.comDetails about MegaFon’s distribution deal with Apple (NASDAQ:AAPL) have been revealed in a financial report that was recently released by the Russian wireless carrier, reports Reuters. MegaFon, Russia’s second-largest wireless carrier, signed a new distribution deal with Apple in January after abandoning the iPhone four years ago due to a dispute over sales volume requirements.

According to the 2013 financial report obtained by Reuters, Megafon agreed to buy a minimum of 750,000 iPhones from Apple over a three year period that ends in 2016. Besides promising to purchase a large number of iPhones, Megafon also agreed to spend approximately $28 million (1 billion rubles) on iPhone advertising and marketing over the same time period. Apple typically requires its carrier partners to subsidize the promotion of iPhones and to meet certain sales goals. Apple’s distribution deal conditions have sometimes been a source of contention between the iPhone maker and its carrier partners.

However, an industry analyst cited by Reuters said that the sales volumes outlined in the California-based company’s contract with Megafon were reasonable. “Based on MTS’ (NYSE:MBT), estimates, in the fourth quarter alone around 650,000 iPhones were sold in Russia,” Raiffeisen Research analyst Sergei Libin told Reuters. “If the smartphones sales’ dynamics and iPhone’s share of this market do not change dramatically, around 8 million iPhones could be sold in Russia during the next three years, and Megafon’s share will be just over 9 percent…I would not say it could sell much more than this.”

MTS, Russia’s largest wireless carrier, is currently negotiating a direct deal with Apple. In the meantime, MTS is acquiring its iPhones via deals with other distributors. “At the moment, we are discussing the terms of cooperation that would be acceptable for both sides,” said an MTS spokesperson according to Reuters.

Last year, Apple briefly had no distribution deals with any of the three major Russian carriers after VimpelCom (NASDAQ:VIP), the country’s third-largest wireless operator, dropped the iPhone in July due to Apple’s sales volume requirements, reports Russia’s Hi-Tech.Mail.Ru. However, VimpelCom signed a new contract with Apple last October, reports Reuters.

According to Euroset data cited by Reuters, Apple’s iPhones only accounted for 9 percent of the total number of smartphones sold in Russia in 2013. However, thanks to the company’s premium pricing strategy, it held a 20 percent share of Russia’s market in money terms. Based on cellphone retailer Euroset’s data, Russia’s smartphone market is worth over $5 billion.

Apple CFO Peter Oppenheimer cited “strong year over year iPhone growth” in Russia during the company’s fiscal first-quarter earnings call. However, despite the growth, Russia’s unique restrictions on smartphone subsidies make it difficult for Apple to sell its devices to a wider range of Russian consumers. As noted by Bloomberg, Russia does not allow wireless carriers to subsidize devices with long service contracts and monthly payments and instead requires consumers to pay the full off-contract price of a smartphone. This makes Apple’s premium devices prohibitively expensive for most Russian consumers.

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