Apple’s iPhone: domestic staple, potential international failure

July 15, 2013

    iphone international failure

    Everywhere you go, iPhones abound. In the hands of hipsters and Grandmothers alike, the iPhone is ubiquitous. For many, the iPhone is what a smartphone should be, and nothing else could be considered. Sometimes the reason is Apple’s ecosystem, which the user is invested in wholly. Other times, it’s based on an archaic understanding of Android, and the misconception that an iPhone “just works”.

    Apple is doing a poor job of keeping their fanbase growing of late. While Android’s massive market share is not surprising to anyone, the real issue isn’t users. Apple’s real problem lies in the middle-man, who is growing increasingly discontent with the California kings of tech. Apple requires that carriers sign rigid contracts for volume commitment, ensuring their revenue stream remain intact. What they fail to appreciate is the long-term trouble this breeds.

    Domestic squabbles

    Verizon, the largest carrier in the US, seems like a juggernaut that would have little trouble moving any kind of iPhone volume that was asked of them. While the details of carrier contracts with Apple are never disclosed, we can look elsewhere for clues as to why carriers have grown tired of Apple’s practises. The Wall Street Journal reports that Verizon’s volume commitments went from $100 million in 2009 to $43 billion in 2010. That was the same time frame they signed a deal for iPhones, which hit their shelves in February of 2011.

    While we can’t believe that entire commitment to be iPhone related, we’re sure a large part of it is. For context, estimates are that Verizon had $16 billion in iPhone sales for 2011 and 2012, combined. Manufacturers like Samsung haven’t had the same success in demanding volume orders from carriers, so we’d have to believe that huge jump in dollars spent on devices was largely due to Apple, even if not wholly.

    galaxy s4 vs iphone 5 5 back aa

    Sprint’s stopgap

    A few years back, Sprint leveraged the farm to get iPhones. A fledgling number four provider in the states, they felt they needed the iPhone to compete and reverse their trend of subscriber exodus. They made a huge commitment to Apple for the device, and it helped to reverse their downward trend. At the time , Apple Insider called Sprint’s service for the iPhone “tragically wrong”, but device sales didn’t reflect that.

    Verizon’s volume commitments went from $100 million in 2009 to $43 billion in 2010.

    Overall, Sprint isn’t winning with the iPhone. Even when they reported their biggest quarterly gain in five years’ time after the iPhone showed up in Sprint stores, much of those customers were prepaid with Boost or Virgin Mobile, both Sprint entities. Even with a 304,000 jump in new subscribers to the Sprint brand itself, much of that iPhone based, Sprint may have gotten themselves in deeper than they imagined.

    Subsidies for iPhone customers were going to cost Sprint 40% more than non-iPhone customers, which in turn meant less profit. It also meant less profit over the term of the contract. This subsidy concern was to be offset by customers sticking with Sprint, according to Sprint CFO Joe Euteneuer. Leveraging iPhone subsidies against an eroding customer base may not be wise, and we can once again assume Apple’s volume commitment demands didn’t help. Sprint, in turn, is not expected to see a return on their iPhone investment until at least 2015.

    Samsung HTC iPhone carrier prices

    Apple’s worldwide troubles

    Internationally, carriers may have learned a thing or two about the Verizon and Sprint interactions with Apple. VimpleCom, owner of Beeline (the third largest carrier in Russia), has cut ties with Apple entirely. This comes on the heels of the two leading carriers in Russia — MTS and Megafon — doing the same. The reason given by all three? You guessed it.

    Oddly enough, the one thing stopping Apple from having their device on the largest Japanese carrier is the very thing they market so heavily as a benefit to iPhone ownership: the lifestyle.

    “Conditions are too harsh”, according to Dmitry Ryabinin, chief analyst for Russian website Hi Tech. Between Apple opening their own retail stores in Russia, their restrictions and demands on marketing, and the volume commitments they demand of all carriers, the moves made by all three Russian carriers are probably to their benefit. As a result, Apple’s Russian market share fell 0.6% to 8.4%.

    The sentiment is also echoed in Japan, where NTT DoCoMo is reluctant to carry the iPhone. As Japan’s largest carrier with around 60 million subscribers, NTT is one who could probably afford to take the longer term risk. NTT is losing customers for the first time in a long time, and an iPhone could help in a resurgence, much like it did for Sprint. The iPhone is also favored in Japan, with about 42% of all devices being Apple’s baby.

    What NTT is protecting is their culture, one which they have manicured to be a “lifestyle system”. Oddly enough, the one thing stopping Apple from having their device on the largest Japanese carrier is the very thing they market so heavily as a benefit to iPhone ownership: the lifestyle. NTT sees the iPhone as a device which could compromise their services, and perhaps erode their culture. Like in the USA and Russia before them, the rigidity of dealing with Apple now is compromising the iPhone’s future in Japan.

    Apple Logo iPhone 4S 1 1600

    No end in sight

    Apple has very successful retail stores, and a great online presence, so there is nothing stopping customers from getting a device via those routes and simply activating it with a carrier. Consumers are reluctant to do that, as it requires they purchase the device outright, which means more out of pocket. This is the same headache carriers are facing.

    If Apple wants the continued support of carriers, they’ll probably have to soften their stance in regard to the iPhone.

    When contracts are signed, carriers agree to volume purchases as well as payment options. Often, they make smaller payments with a larger balloon payment later on. Verizon is set to make a $23.5 billion payment to Apple this year, and if the two-year sales figure of $16 billion is any indication, they stand to lose both face and money in 2013.

    If Apple wants the continued support of carriers, they’ll probably have to soften their stance in regard to the iPhone. It’s the only device Apple requires support with, and the growing Android ecosystem is a large enough hurdle without having carrier roadblocks in addition. Carriers like Verizon and Sprint are currently in the middle of long-term contracts for the device, but what happens when those contracts expire?

    The term “mutiny” comes to mind.

    Comments

    • Kindroid

      These losses from iPhone contracts are going to end up being paid by Verizon users. Android users are going to subsidize Apple handsets. Verizon better fix this problem in the next contract, or the mutiny will be among its own subscribers.

    • End in sight

      If I were on Verizon, I would jump ship. I have never signed with Verizon and I never will.

      I think Apple is really going to have to re-examine their global business model as they stand the chance to lose a lot of opportunities.

      • Piyush

        so you want carrier bloatware on your device. think about it , it is loss for consumer more than loss for apple.

    • Locutus

      Good article Nate. Although you should have included something about European networks complaining about Apple’s mutlti year deals to the European Commission.

    • Mike Bastable

      NORMAL SERVICE HAS RESUMED…why did I know that this was yet another half arsed Nate Swanner Apple baiting article just by reading the headline. After a promising week of sensible reporting sad old Nate returns. Superfluous and speculative. Shame to see this rubbish back on A.A.

      • Cristian Borsa

        How is this speculative when the article deals with hard numbers?

        • Mike Bastable

          Please read sources in context, not Nate’s creative context. Apple will renegotiate with carriers and there is no huge unique situation there either, this often occurs with OEMs, especially during a global recession where most OEMs are failing to meet sales targets.

          • APai

            Nate is right IMHO, Apple’s been too bullheaded about the situation. early in the game a couple of years back, they could dictate whatever crap to the carriers. (some of it good for the consumers – like a pristine iphone vs carrier crapware laden android). now, Android is winning on multiple fronts, and the situation is more even with apple no longer having the ability to create “magic” . it’s abundantly clear that’s happening abroad, US seems to be the only country where iphone is still very strong. Europe is shifting to android, asia sans japan has always been android. countries like India have just gone over 90% to android. I fail to see why you are so inclined to trash Nate’s views as over the top assumptions.

            • Mike Bastable

              Hi APai,
              IMHO i liked your reply, thanks. However Nate was very specific in his post and much of it
              was speculative and looking for trouble where there is no real problem to be found. I could research and write the exact opposite article in 5 minutes, and i would include all of my sources for verification). The points he raised were interesting and would make a good article in capable neutral hands. in fact your comment is more balanced and has more value than his article IMHO.
              It is important that a Journalist be aware, or make himself aware, of the situations in the various regions regarding Smartphone sales (the Russian market is VERY different to the German market, for example), this should be taken into account when posting. The actions of
              Carriers to get access to the iPhone were motivated by very specific circumstances. These actions have been deemed successful
              by Investors and by the companies themselves.
              Simply put Android is dominant. iOS is second but firmly so. Apple makes a fortune selling its wares. Some Android OEMS make money, most do not. Android generates great profits for Carriers, as does iOS. As market share develops OEM to Carrier contracts will change too.
              This is interesting. Sony has had too work hard to regain a foothold at US carriers for example…. Apple has always punched above it weight in this regard.
              Nate could have written an awesome piece on how this may change as Samsung gains Apple-like status…and also how this
              dominance by Samsung, that is developing, may affect the other Android OEMS we love so much. This would have been relevant and
              worthy of an Android site, instead of engaging in Apple baiting.
              So i agree with you and enjoyed your views. I disagree with lazy provocative articles that have no place on such a good site as Android Authority. Sorry.

    • MUTINOUS

      Verizon is the best carrier here in U.S.A. There is not a whole lot of choices if you want data speeds, and coverage. I am not saying they are perfect but if we had more viable choices I think Verizon will be in trouble….Oh wait, Sprint closed on Clearwire, Softbank has their back, and they just closed their iDen network to make room for their LTE Advance. I see a move about to be made by Sprint. Please O Lord give us choices. The high price of the iPhone only gets passed down to us the consumer. It’s hard to fault Apple’s business model since they have more money than most countries.

    • Mike Bastable

      A quick rational translation of Nate’s article:

      “You see loads of iPhones. All ages seem to like and use them for many reasons.
      I wonder why they don’t use Android?
      Android is huge, iOS smaller. Carriers don’t like this one bit. Apple troubles are of their own making.
      There is speculation that Verizon has a mega bucks deal with Apple, made at the beginning of the recession. Apple earns money from this, (grudgingly:) Verizon does too.
      Sprint has iPhone too, worked hard to get them. It helped them increase market share!. In my opinion the gains made are poor and Sprint made a mistake (NATE), despite having big gains.
      iPhones are expensive, more so than Android. Sprints relationship with Apple extends beyond 2015
      Russia has an unusual market for Smartphones and handsets are purchased differently to here in the US. iPhone is about 26%, and under pressure from Windows Phone, being pushed heavily by the Telecoms there, will be interesting to see how this plays out.
      In Japan iPhone is nr1 at about 40%+, NTT, big telecom, would like more control of its customers but has to deal with Apple, because it sell phones.
      Apple’s rigid demands to Telecoms can piss them of whilst they both earn money anyway.
      You can buy an iPhone all over the place, really u can!, just like Android!
      The mysteries of carrier supplier contracts go above my head really but that is what this article is supposed to be about, oops!.
      In a recession contracts will probably be renegotiated, maybe even in favor of Carriers?, who knows (i don’t)
      What will happen when these contracts running now run out?
      insert here my Snidey remark, lol”

      love Nate, fanboys argue underneath please

    • Simon Reis

      A reflection from Sweden where Tele2 is the country’s second largest carrier with 3,4 million customers (population in Sweden 9,5 million).

      Because of Apple’s way of doing business the CEO of Tele2 in April said: “I hope the Apple rots. It’s difficult to do business with Apple” and “It would have been great if people stop buying their products. It’s very difficult to earn money on their products”. It’s interesting when a CEO of such large domestic carrier expresses his frustration with Apple so clear even tho most phones they sell are iPhones.

      Link to source which is the largest business-paper in Sweden: http://www.di.se/artiklar/2013/4/24/tele2s-vd-vill-bli-av-med-apple/

    • Seth Forbus

      i love how T-mobile found a way to sell it without losing much money. Still though, more of our customers seem excited about the xperia Z or the galaxy s 4.

    • APai

      India being a price sensitive market, and no carrier subsidies, the iphone was always viewed as an over the top luxury phone. Samsung took the top spot away from Nokia. to break that stranglehold, apple recently came up with their exchange old phone/ installment schemes. Samsung came up with an even more aggressive scheme with similar conditions plus cashback offer. you can guess, who’s winning!

    • Jhedpredon

      Now I know why Iphones here in the Philippines are very expensive.

    Popular

    Latest