Did Apple Just Force Russia to Love the iPhone?

Source: Wanwa / Wikimedia Commons

“Seeing flattening sales [of iPhones] in the developed world, Apple is looking into the richer emerging markets,” Moscow-based IDC analyst Simon Baker told Bloomberg, and Russia could be becoming one of those markets. “Despite a slowing economy, Russians have a fairly good income and high propensity to spend it,” he added. While Apple’s (NASDAQ:AAPL) biggest BRIC market — China — is nearing smartphone saturation, iPhone sales in Russia are expected expand significantly in 2014. Compared to other large economies, far fewer mobile phone users in Russia own smartphones; in China, 85 percent of mobile phones purchased in 2013 were smartphones, while in Russia, that figure was just 47 percent, according to Baker.

The take home news from the recent December-quarter earnings reports of Apple and Samsung (SSNLF.PK) — the giants of the smartphone market — is that sales of their devices are slowing. At first, such a statement may seem surprising given that research firms Strategy Analytics and IDC both reported that smartphone sales grew by a double-digit figure in the fourth-quarter of last year, soaring 34 percent from the year-ago quarter, according to Strategy Analytics’ numbers, and only 24 percent according to IDC. But smartphone sales figures from Apple and Samsung, as well as recent analyses, suggest that the smartphone market has reached a turning point.

Apple’s first fiscal quarter results — released January 27 — showed iPhone sales were record, the 51 million phones sold in the first fiscal quarter were the most Apple has ever sold in any quarter, surpassing the 47.8 million sold in the year-ago quarter. Those strong sales helped the company post strong earning and profit numbers. Yet, even though Apple upset tradition and released two versions of its flagship smartphone — the iPhone 5S with Apple Touch ID and the low-cost iPhone 5C with the colored polycarbonate shell — the sales numbers missed expectations. That fact suggested to investors that the iPhone has little room to keep growing.

Similarly, Samsung’s fourth-quarter 2013 earnings from its mobile division were flat compared with a year ago, while smartphone shipments decreased “slightly” from the third-quarter levels. The shipment decrease does not in and of itself mean the overall smartphone sales are slowing, but it is a sign the industry is under pressure when considered with other evidence. “As the world’s largest smartphone player, Samsung is a critical bellwether for smartphone market health and the company has been working through an inventory correction since [the fourth-quarter]. Company management expects weaker demand for smartphones in the current quarter, largely due to increased competition,” wrote Wedge Partners analysts in late January, after the South Korea-based electronics manufacturer reported its first quarterly profit decline in two years.

Russia could provide a much-needed market for Apple. Last year, iPhone sales in Russia doubled their 2012 figure, reaching 1.57 million units, according to IDC. Those sales not only generated $1 billion for the iPhone maker, but came despite the fact that midway through the year not one of the country’s top three wireless providers were selling Apple smartphones. In addition to the encouraging 2013 sales numbers, Bloomberg reported Tuesday that now Russian mobile carriers may “not have much choice” but to offer customers Apple’s iPhone.

Apple has spent years trying to entice Russian mobile carriers to offer its devices, but the Apple’s request that carriers cover the costs of subsidizing and promoting the iPhone — as they do in the United States and other developed markets — could not be met. Russian law prohibits phone companies from discounting devices for customers signing long-term contracts. Plus, Russian mobile carriers considered Apple’s terms, like its minimum sales requirements, to be too onerous. “Apple wants operators to pay them huge money, subsidizing iPhones and their promotion in Russia,” Andrei Dubovskov — chief executive officer of OAO Mobile TeleSystems (NYSE:MBT), the country’s largest mobile carrier —  said in an interview with Bloomberg in July. “Now it’s not beneficial for us. It’s good we stopped selling the iPhone as these sales would’ve brought us a negative margin.” At the time of the interview, smartphones running Microsoft’s (NASDAQ:MSFT) Windows mobile software almost matched the iPhone in terms of market share.

MTS stopped selling the latest iPhones at the end of 2012, and instead, the carrier agreed to promote Microsoft Windows handsets, including Nokia’s (NYSE:NOK) Lumia. Windows Phone zones have even been opened in its flagship stores.

Yet, less than half of all handset sales in Russia are generated by carrier-branded stores, and that peculiarity of the Russian smartphone market gave Apple an opportunity. The company circumvented the carriers by distributing iPhones through electronics stores like Svyaznoy, a chain that sold approximately 700,000 Apple smartphones in 2013. As Eldar Murtazin, an independent analyst in Russia, told Bloomberg, most of those phones were the older iPhone 4 and 4s models priced below $500. That device mix suggests that Russian customers may find a lower-cost version of the iPhone more appealing.

That strategy put pressure on mobile carriers, and those companies have started restoring business ties with Apple in the past several months, as the publication reported. After a three-year break, MegaFon (MFOYY.PK) resumed its contract to sell the iPhone in January. Similarly, MTS and VimpelCom (NASDAQ:VIP) began selling iPhones once again in October.

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