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Apple's iPhone: domestic staple, potential 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.
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.
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.
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.
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.