Apple must win back carriers

Rethink

The markets are becoming accustomed to churning stomachs ahead of Apple results these days, and once again there is considerable nervousness about the next set of quarterly figures, due July 23.
 
The once invincible vendor needs to produce something dramatic, and that does not only mean an impressive next iPhone, but also major changes in the way it deals with its main channel, the carriers. With MTS dumping iPhones in Russia - enabling Windows Phone to overtake iOS in share - taking a more flexible approach to cellco deals is becoming urgent.
 
Operator resentment of Apple's famously tough contracts and high handed approach has been mounting for some time, to the extent that some major players, notably China Mobile, have refused to sell the iPhone. Most, however, have felt unable to pass on such an iconic handset, and operators have continued to sign deals with eye-watering sales commitments, even when the age of exclusives was over.
 
However, if the iPhone continues to lose its magic, and cellcos can make a similar impact with other devices with lower subsidy and marketing costs, Apple will see its partners melting away.
 
In Russia, for instance, MTS stopped selling the iPhone altogether at the end of 2012 and is majoring on Windows Phone devices, which has helped enable the Microsoft OS to overtake iOS, gaining 8.3% of smartphone sales compared to 8.2% for Apple.
 
“Apple wants operators to pay them huge money, subsidizing iPhones and their promotion in Russia. Now it's not beneficial for us. It's good we stopped selling the iPhone as these sales would've brought us a negative margin,” MTS CEO Andrei Dubovskov told Bloomberg.
 
 
Verizon could face $14b iPhone shortfall
 
The resolve to force Apple to moderate its terms will only be accelerated by reports of how much the iPhone subsidies bite into profits – even at original partner AT&T – and by horror stories of the cost of any shortfall in sales. For instance, Verizon Wireless could have a bill of up to $14 billion for iPhones, if it fails to meet its commitments to Apple, according to Moffett Research.
 
Sprint was heavily criticized for the $15.5 billion in handset purchases it promised Apple in their four-year deal, but Verizon's risk may be even higher - especially if the OEM, whose star has fallen somewhat lately, fails to deliver a knock-out device this fall.
 
According to the report, written by former Sanford Bernstein analyst and Apple watcher Craig Moffett, and covered by Bloomberg, Verizon signed a multiyear agreement with the iDevice maker in 2010, and is obliged to buy $23.5 billion worth of iPhones this year alone. That figure is twice the level of iPhones the carrier sold in 2012, which could leave Verizon with a shortfall of between $12 billion and $14 billion, equivalent to $4 to $5 per share.
 
Other carriers with major iPhone commitments may be in a similar position as demand for the flagship handset flags – Wall Street is currently predicting a 22% fall in net income in Apple's third fiscal quarter.
 
“It is likely that Apple would be reluctant to simply ignore these commitments, since many other carriers around the world are probably in a similar situation, and a simple amnesty would set an unwanted precedent,” Moffett wrote. “It is therefore unrealistic to think that Apple won't extract some consideration for renegotiating these shortfalls.”
 
Some operators have publicly denounced Apple's tough terms, and China Mobile executives have suggested that purchase commitments are one of the stumbling blocks that have prevented the world's largest cellco launching an iPhone. Moffett points out that Apple has announced fewer than 12 new operator contracts since September 2011, and although it has 240 deals, it is facing tougher competition from Samsung and others in some of its key accounts, while new additions have sometimes been in lower value prepaid sectors.
 
 
T-Mobile tries to rewrite carrier/device rules
 
Even the new partners it is recruiting, like T-Mobile USA, are often taking a different approach to the market. TMo has dumped subsidies, with its “UnCarrier” strategy, and is instead offering customers financing to acquire the iPhone and other devices.
 
This could actually help Apple by making its smartphone more affordable, without having to launch a low cost model and cannibalize its base – and the operator is taking the risk of the credit deal. However, the shift away from subsidies, which is gathering pace as a trend, will be a critical factor in cellcos renegotiating their terms with Apple.
 
T-Mobile USA, and its CEO John Legere, are outspoken cheerleaders for the new approach, and while Legere has acknowledged the disadvantage of not carrying the iPhone for so long, he insists it is selling well now, but is just one among many successful handsets, not the heart of the business as it has been at AT&T.
 
But he reflects the wider need by carriers, especially those in second tier positions, to innovate in how they allow consumers to buy devices and services, rather than sticking to the conventional choices of subsidy/two-year contract, prepaid or SIM-only.
 
TMo's latest innovation is Jump, a program which allows customers to upgrade their handset as frequently as every six months. For instance, a user could buy an iPhone 5 today with a down payment of $150 plus a financing deal (six months' worth of $20 instalments plus six months of $10 Jump payments).
 
They can then trade in the iPhone 5 and get the new model on updated financing terms – in return for the additional $10 a month during the early part of the deal, TMo in effect wipes the slate clean on owings for the first handset, as long as the customer upgrades to a new one. 

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