Here’s why Apple dropped the ball in Russia

By , Jul 16, 2013

apple store russia

Russia is one of the BRIC countries mentioned alongside Brazil, India and China as areas where demand for smartphones is increasing rapidly. Yet, recently, the last of Russia’s big-three carriers stopped selling the iPhone, leaving it up to resellers and Apple’s new online store to meet demand.

Why are Russian carriers saying no to the iconic handset – and adopting competitors, such as Samsung and Microsoft? The answer could be as simple as 1-2-3…

The Russian market for smartphones is large: 180 million mobile phone owners subscribe to one of the nation’s three carriers. Reselling mobile phones made 36-year-old Maxim Nogotkov a billionaire, according to Fortune.

However, less than a year after a black-market iPhone 5 was selling for $3,700, none of the three top carriers offer the iPhone. The news site’s Philip Elmer-DeWitt points to three potential reasons: subsidies (or lack thereof), import fees and claims of what one carrier – Beeline – described as “draconian contracts” from Apple.

Beeline logo (medium)

Mobile phones in Russia are licensed by the government agency Rospechat.

The agency doesn’t allow subsidies of mobile phones, which would allow an iPhone 5 to be sold in America for $199 – much more palatable than the $649 full price. While a stumbling block, Apple has had to work in other countries which do not permit subsidizing the end-cost of smartphones.

Russia mobile phone share
Chart via Fortune.

In India, consumers are offered payment plans which stretch the cost over time, as well as discounts and other techniques to defray the price.

Russia’s import duties and taxes add $269 to the $649 unlocked iPhone 5 available at Apple’s online store, according to the report.

Apple says $140 of that $269 is Russia’s value-added tax, while $129 is import duties and a questionable channel mark-up. This is last item is odd, since it would mean Apple is paying a fee to sell its own handset in an Apple-owned site.

iPhone 5 (Beeline 001)

As Elmer-DeWitt writes, the question “may be one of those mysteries only Apple’s Irish subsidiary can answer,” which is a reference to Apple’s technique of filtering profits through an Irish unit that then charges Apple a fee which can be written-off.

A third potential reason why no Russian carriers are opting to sell the iPhone is one we’ve heard before: onerous contracts.

Russia’s Beeline, a unit of VimpleCom, cited the “harsh conditions.” VimpelCom is the sixth largest wireless carrier in the world.

In a Bloomberg interview, the CEO of MTS – Russia’s largest carrier – said “Apple wants operators to pay them huge money subsidizing iPhones and their promotion in Russia.”

MTS commands more than a hundred million subscribers. Together, Vimpelcom and MTS count more than 300 million subscribers.

Closer to home, we recently heard that Verizon might be on the hook to Apple to the tune of $14 billion for unsold iPhones it had contracted to buy. The contracts also restricts carriers placing their own apps on the iPhone’s homescreen and logos on the device.

As a result of the opening given by carriers, rival smartphone makers have increased their Russian market share. Microsoft, for instance, saw its influence rise to 8.2 percent, up from 5.1 percent in 2012

When MTS dropped the iPhone, it added Microsoft’s Windows Phone. By contrast, Apple’s share of the Russian market has slipped to 8.3 percent, down from nine percent.

If you’re from Russia and frequent this blog, I’d love to hear from you down in the comments about the Apple situation in your country.

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  • http://www.facebook.com/luisreyespr Luis

    “The answer could be as simple as 1-2-3…” I was truly waiting an easy answer.

    • Dan

      seriously… halfway through I realised I didn’t care and stoppd reading

  • Alexander Bus

    Huh, just noticed that carriers stopped selling iPhones here. Not that it’s a big problem – you can still get them anywhere for around 800-1000$(16GB) to 1200$(64GB) from official resellers.

    And, by the way, I remember the times where subsidized plans were a thing here and you could buy different phones(even the iPhone, which seems strange) for 100$ or so and pay a lot afterwards. Don’t know why it was banned though.

  • Tigran

    Hi there! I’m from Moscow. I would like to mention one more point – iPads are sold at quite reasonable prices in Russia, like in Europe. So there might be some other reasons for greater prices on iPhones. I used to think it was because mobile operators in Europe and Nothern America subsidies (sell with minimal margin) even Pay&Go iPhones, meaning profits from mobile services. Whereas official iPhone in Russia is really 1.5 times more expensive (and the difference was even bigger before). As for me both my iPhones I bought in London. Still iPhone seems to be the most popular smartphone at least in Moscow, you can make it sure entering our underground. But people try to purchase it from abroad at cheaper prices.

    • Adrayven

      Odd. Wouldn’t Samsung pay the same fees? If so, how could they make any money with such high import fees. That’s like 1/3 the retail cost of the phone.. It costs them about $250-300 just to make the thing(high end S4), same with Apple.

      I would be interested to see if others are paying such high import fees.

      • Kurt

        good point

      • Tigran

        They are, but let’s compare the prices:

        iPhone 5: UK – £550, Russia – £590. Actually it was £715 in Russia, retailer Szyaznoy dropped prices in Dec’12, but it was too late – most of consumers bought it abroad or from smuggler internet shops.

        Samsung Galaxy S4: UK – £550, Russia – £613, and as far as I know it was the same price from the very beginning.

        Nokia Lumia 925: UK – £500, Russia – £510.

        I suppose it depends on how aggresive the vendor is in pricemaking. I know that Szyaznoy (Russian retailer) receives big discounts from Nokia and Samsung for purchased smartphones as an advertising fee etc, so at can afford it to sell the smartphones at lower prices – and the vendor’s reason is to occupy the market. Unlike Samsung and Nokia Apple is not aggresive in Russian market, it doesn’t care much about it. Still due to price decrease I mentioned above perhaps something has changed but not for Russian carriers – Szyaznoy is the only official retailer. I can’t say if Samsung and Nokia do make any profit in Russian market while occupying it.

  • Lordthree

    In soviet Russia, iPhone buys YOU

  • Adrien FRANCOIS

    On apple’s russian online store the iphone is only 25€ higher than in europe

  • megamoo

    Its common practice for people in Russia to buy their phone independently of Carrier, and they can switch around with the drop of a hat. there are no contracts in Russia they are all pay as you go, so the carriers get nothing out of handing a particular phone to the customer.

    So It makes almost no sense for carriers in Russia to sell the iPhone, they basically have to buy a huge volume and pay apple for the phone but get nothing for it.

    One might think that a Carrier in Russia may want to have the iPhone to have an edge on the other carriers, but all the carriers in Russia are actually one entity pretending to be multiple carriers. They why they all dropped the iPhone.

    • alaska99801

      Nice monopoly they have.

  • n0ahcruz3

    You mean Russian carriers drop the ball lol

  • alaska99801

    Sutherland mentions that carriers in Russia,like the rest of the world, don’t get to put their apps (junk) on the iPhones, like it is a bad thing.
    Tech writers, what morons. If Apple did, he would complaint that Apple is doing like all other phones manufactures. Tech people have always stupid things to say, don’t you?
    And, you would be one of the first complaining that iPhones are not getting regular updates. Like the rest of phone owners have to do with android. Waiting months to get an update that is already old.

    So at least say something intelligent and understand that it is a great thing that Apple doesn’t give in to the carriers for BS.

    Like someone mentioned before and you Sutherland missed, it is no different on the customs charges than any other manufacturer. Maybe a little research would have helped. Like understanding that the only country with draconian phone plans that lock consumers for years is the U.S.
    The rest of the world lives on month to month. I’m glad that month to month is beginning to catch on in the U.S.A.

  • Cuenta De Inscripcion

    If I can get an Iphone in Russia, i can’t care less who delivers it to my hands. In this country where viruses and hacks are the norm for the android ones the only phone that delivers security is the iphone, so no way I will even consider a galaxy or any android in offer for a few dollars less. besides, iphone hardware lasts for 2 years, the others, like PCs you must change all the time to keep up with whatever changes happen in android.