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.

iphone-russia

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.

Author: Stasys Bielinis

While I like to play with the latest gadgets, I am even more interested in broad technology trends. With mobile now taking over the world - following the latest technology news, looking for insights, sharing and discussing them with passionate audience - it's hard to imagine a better place for me to be. You can find me on Twitter as @UVStaska'

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  • abugida

    This doesn't make sense. Why would they have signed to sell (effectively) 1.6 million iPhones in Russia per year? There's no country in the world, outside the US, that could support these kinds of numbers.

    In France, it took Orange 18 months to reach 1 million. [1] In the UK, it took O2 16 months. [2] In Germany, T-Mobile (according to rumours) still hasn't reached 1 million after 20 months.

    Further, you claim that Russian carriers had to purchase 400k iPhones for the launchin late 2008. At the European launch of the original iPhone in late 2007 there were reports that O2 had agreed to an initial purchase of 200k, while T-Mobile and Orange bought 100k each.

    These are countries where almost every consumer could afford an iPhone, should they decide to want it. In Russia on the other hand, the iPhone is financially out of reach to a big part of the population. In light of this, a realistic goal for the Russian market would be not 1.6 million, but 0.16 million per year.

    [1] http://news.cnet.com/8301-13579_3-10247899-37.html
    [2] http://www.pocket-lint.com/news/news.phtml/2259

  • http://www.staska.net Staska

    It might not make sense, but many things do not make sense about Russia to an outside observer like you and me, o even Russians themselves :) Russian even have a saying “Umom Rossiju ne poniat” which roughly translates “You can not understand Russian only with your mind…

    On the other hand, the actual figures reported above have been confirmed through multiple trusted sources in Russian Press, and also official shareholder reports issued by operators themselves to shareholders. So I have no doubt that they are more or less correct.

    As to why Russian operators where suckered into ordering these amounts, I have no idea. One of the reasons might be that there were hundreds of thousands of jailbroken first gen. iPhones imported into Russia even before the negotiations began. And the negotiations went on before the financial meltdown, everyone was feeling rich and certain about the brighter future then. And Apple must have played each of the 3 operators against each other masterfully. They all wanted iPhone very much, and I don't think it was possible to do an exclusive in Russia due to the legal resons.

    You are also wrong about the Russian market. It is considdered one of the key markets for high end devices and fashion/image items (and iPhone 3G ceratinly was one at the time)

  • maksimio

    Insanely interesting to write. I would like you to quote in his blog a link to the source will give.
    Can I use your article in my blog. But I will translate it into Russian.

    http://mobi-info.org.ua/

  • maksimio

    Insanely interesting to write. I would like you to quote in his blog a link to the source will give.
    Can I use your article in my blog. But I will translate it into Russian.

    http://mobi-info.org.ua/