Russian operators unable to sell iPhone. May be liable for $1 billion in fines to Apple

Russian mobile and business sites have been abuzz about state of the iPhone in Russia these past few weeks. Turns out the Apple phone is not too hot over there.

But that is not the biggest problem.

The worst part is that swayed by the lure of iPhone 3G last fall, Russian mobile operators bent over and signed the contracts with Apple committing themselves to sell millions of iPhones during the next two years.

And, as the sales of the handset did not take off, they are now facing hundreds of millions of in fines from Apple.

Here’s what I’ve been able to parse from a few Russian sites – Vedomosti, Mobile-Review and Eldar Murtazin’s blog:

• All three main Russian operators have signed-up to sell iPhone in Russia. Of them,  Vimpelkom pledged to sell 1.5 million of iPhones in the next 2 years, Megafon took on to move 1 million iPhones in 2 years, and MTS went for 1 mil of iPhones in 3 years.
• At this moment a total 900 000 iPhones have been imported to Russia. The problem is, that only 400K of them were officially brought in by Apple’s operator partners. The rest are jailbroken iPhones that got there through “grey” channels.
• Of the 400K iPhones bought from Apple in Q4, 2008, operators were able to sell into retail channel 280K until April. And only 127 000 of them have actually been sold to the end user (or at least that’s what operators were paid by retailers).
• None of the operators have actually bought a single iPhone from Apple in 2009.  (data by Mobile Research Group, Russia)

So in the first six months from  launch, operators were actually able to sell only 127 iPhone units. If this trend continues, Russian mobile carries will sell around 400K of iPhones in the next 18 months, for a total of something like 550K units. Leaving them with a pile of 2-2.5 million of pledged, but unsold units when the bill comes due.

Depending on the actual iPhone sale price or fines in the contract, this could amount to $500 mil to 1 billion $ in fine payments to Apple. Two Russian carriers, in their reports to shareholders,  have already officially admitted possible significant fines and negotiations with Apple.

According to sources, since the start of the year all three Russian carriers have been busy in negotiations with Apple to change the terms of the deals. They want reductions either in price or quantities.  But so far Apple won’t budge.

Given the still enthusiastic support elsewhere and vibrant “grey” iPhone market in Russia, Apple may not care much what Russian carriers have to say. A deal’s a deal, after all.

On the other hand, angering all main Russian carriers with multi-hundred million dollar fines may close both official and “grey” Russian market to iPhone altogether.

Well, it would be interesting to watch how this situation develops in the next few months. Stay tuned

Update: While I was writing this article, Eldar posted an update on his blog.

Apple is now also looking to sell iPhones directly through big retailers in Russia. However the terms offered by Apple are unacceptable for now.

Meanwhile, mobile operators now officially told Apple – renegotiate the contracts, or there will be no iPhone in Russia. And (privately) noted that they’ll do anything in their power to disable all jailbroken iPhones on their networks otherwise.

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Posted on 21 May 09 - Filed in Apple, Wireless, iPhone - Comments - Written by Staska

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