Apple Wants To Use The iPhone To Take A Bigger Bite Out Of Russia

With all eyes focused on what new iPhone handsets Apple may be launching very soon — if reports are to be believed, two new models, and a new color, on September 10 — some of Apple’s top executives this week are making a trip to Russia to meet with key distributors to revisit how it sells devices in the country.

Although Apple has yet to confirm what iPhone handsets it will launch next, the meetings are a sign of how Apple may be preparing to launch new, possibly cheaper devices, to revisit a market that has seen demand for its products, but also one where it has faced challenges working with carriers, the presence of a crazily-priced grey market and, according to eager distributors, short supply issues that do not meet demand.

In Russia, we understand, Apple is sending over some of its top people to meet with various retailers in the country. It seems that the details of what the meetings will entail have been very limited, even to the parties themselves.

“Apple is coming to town to talk to different retailers,” one told me. “There is going to be a discussion about getting more active in Russia with the iPhone. I assume the discussions will include models that will be launched here.”

The news appears to confirm reports in July that Apple was gearing up to revisit how it sells its smartphones in the country, after finding it a challenge to replicate its usual model of selling through carriers with handset subsidies — not a typical route in Russia, and one that the carriers apparently thought came with too onerous conditions.

Today, Apple has a deal in place with a key distributor, Svyaznoy, one of the country’s main mobile phone retailers itself. Svyaznoy sells one in every two iPhones in the country, a spokesperson tells me. In addition to its own retail business, Svyaznoy acts as a distributor to other retailers, both offline and online. Its competitors, understandably, think this is unfair at best. “We either don’t get access to iPhones, or a sub-minimum level of stock from after Svayznoy,” a retailer told me. “Svyaznoy completely controls the supply and the market.” Apple’s meeting this week could see more retailers added to that primary distribution ring, which also includes Apple itself. Update: Svyaznoy says it doesn’t act as a middleman as previously described. The company has a large retail footprint of its own. Its direct contract for iPhone sales, in addition to other Apple products, means it sells the iPhone in 3,300 Svyaznoy stores across Russia and online. “We are the biggest retailer in Russia with such kind of contract,” the spokesperson notes.

In addition to that, Svyaznoy has a contract to be a part of the Apple Premium Reseller network, selling devices under its CStore brand, a kind of stopgap in a market where Apple has yet to launch its own bricks-and-mortar stores. “We launched the first store in February 2013 and at the current moment we have 8 stores in 7 cities (Novosibirsk, Samara, Nizhny Novgorod, Krasnodar, Kazan, Yekaterinburg and Voronezh),” the spokesperson says. “We are first of all concentrated on Russian regions as the ‘presence’ of Apple gadgets there is not sufficient.”

For Russian consumers who think that any negotiations could spell a new kind of price war very soon, or a rush of new devices quickly, don’t hold your breath.

Typically, Apple distributes the new iPhone in Russia about two months after it has been announced. This time around, it looks like China won’t get it for three months, according to some reports. It’s not clear yet whether that pattern will be interrupted in Russia this time around, although Apple has certainly been speeding up how fast it distributes iPhones compared to early days.

If Apple launches a low-cost device — as a renewed focus on Russia could imply — Apple has a shot of killing two birds with one stone in emerging markets — and Russia specifically, which is currently the largest internet market in Europe and one of the fastest-growing for mobile usage: Apple can use it as an opportunity to finally give consumers there the supply that it has been demanding. And it can do it at a price point that may not be bargain basement (because Apple) but may finally bring more users into the fold.

These are issues that Apple has been coasting around for years with the premium-priced iPhone, which has still managed to gain users despite them. However, we appear to have reached a couple of tipping points in the last few months that are signs that Apple needs to put the machine back in gear.

For one, we now have more smartphones being sold than feature phones — meaning the market has become even bigger for all players. Secondly, Android has become so big that Apple runs the risk of losing its position as a platform that developers want to continue pursuing: Strategy Analytics puts iPhones share of iPhone sales in the last quarter worldwide at just 14%. And in another BRIC powerhouse, India, IDC notes that Apple’s dropped out of the top 5 smartphone brands in terms of sales, pushed by Android OEMs.

“When you have five percent more users on Android than on iPhone, you can compensate, but when you have a hundred percent or more that starts to make a difference,” one observer noted to me. “The value of Apple is the ecosystem, so if you have Android able to replicate the system, that changes the proposition for developers.”

Russia today

Apple has a lot of challenges, but also a lot of opportunities in a market like Russia (and by association the other BRIC markets of Brazil, India and China). I got a taste of that first hand last week when I was in Moscow, its biggest city and arguably a pace-setter for what the rest of the country will adopt.

When I ride on the Tube in London, it’s always struck me how many iPhone and iPad tablets you see people using — for gaming; browsing emails, catching up and responding to messages (all to be sent when back online since most of London’s Tube network still is without internet connectivity); and reading. This is despite analyst reports that show that the iPhone appears gradually to be losing ground to Android in this market.

moscow metroIn comparison, on Moscow’s Metro subway system when I was recently visiting, I saw a few iPhones being used, but not nearly as many.

(Sidenote: what do you see instead of the iPhone or iPad among consumers on the Metro are a lot of Android devices. Incidentally, instead of tablets, you get a lot of people with e-readers. PocketBook, which also makes an Android-based tablet, is one of the more popular e-reader brands.)

Back to the iPhone… Of those using Apple smartphones, the iPhone 4 and the earlier model were nearly ubiquitous. The iPhone 5 made an appearance more in meetings with tech people; but in fact, even in these meetings I’ve seen executives demonstrate things to me on their devices, which are not iPhone 5 models.

Yes, the pricing of the iPhone still comes at a premium in a country like Russia compared to European countries like the UK, and most definitely compared to the U.S.

In Russia, through distributor Svyaznoy, the iPhone 5 is currently being sold starting at 27,990 rubles if you don’t pay on a credit plan or through a subsidized carrier contract (this is a recent discount from 29,900 rubles, and also less than the price on the online Apple store, where it’s selling for 29,990 rubles). The cheaper of those works out to $849, compared to an $823 (£529) starting price in the UK and $649 in the U.S. for an unsubsidized basic iPhone 5. That’s all the more striking when you consider that the average consumer earns far less in Russia than in these other countries.

And yet interestingly, price isn’t as big of a factor as you would think. For those in the young, educated demographic that has been so good for Apple in other parts of the world, this has meant really pushing financial limits to get the iPhone. People will go out and get loans, and normally kosher people will resort to buying from unauthorized distributors (the so-called grey market), just to get the goods.

And that’s before you start to consider the detail noted by many that a “gold iPhone” (again, if rumors are right) will be a hit in markets like Russia.

Indeed, it’s not so much cheaper pricing that makes Android handsets more popular than iPhone devices. It is the availability of Android handsets. “Android and other OEMs always come to us,” one retailer told me. “Apple is the other way around: we go to them, asking for more. ”

Reports earlier this summer indicated that carriers appeared to be pulling out of selling the iPhone, and inking deals with Android OEMs — although as you can see here, some carriers are still selling the iPhone today, if you’re willing to pay for more expensive models.

This is the crux, it seems: there just aren’t enough iPhones to go around, specifically when you look beyond the most expensive offerings of the latest model.

“Oh, the iPhone sells very well in Russia. The problem is getting the stock,” noted one distributor.

Apple’s CEO Tim Cook also seemed to highlight this high demand, despite the price. “If you look at the Russian market, over 80% of phones are sold in retail outside of carrier-owned stores,” he said in Apple’s July earnings call. “Our activations in Russia set a record last quarter as the highest-ever quarter.”

We have reached out both to Apple and Svyaznoy for comment and will update this story as we learn more.

Photo: Flickr; Flickr