More Setbacks for This Smartphone Giant

Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The iPhone has ruled the smartphone industry for almost half a decade now. Apple (NASDAQ: AAPL) has exerted total dominance on the smartphone and telecom industry due to the huge popularity of the iPhone. The dominance of iPhone and its popularity was so extreme that it had become a competitive advantage for subscribers. The highly competitive and saturated U.S. telecom sector had become increasingly dependent on the iPhone to steal subscribers from competitors.

This changing industry dynamic gave Apple complete power over competitors. The company was able to force carriers to pay ridiculously high subsidies and mammoth marketing budgets. The telecom carriers were forced to incur heavy losses on their iPhone sales just to ensure that their subscribers did not migrate to competitors.

In the last couple of years, telecom carriers have increased their efforts to wrest some of their lost power. Carriers, to reduce the dominance of Apple, also marketed rival platforms like BB10, Windows 8 and Android. None of these strategies have been able to reduce the power of Apple over the U.S. telecom industry. However, the same cannot be said for other parts of the world.

Russia Woes

In a major blow to Apple’s Russian ambition, all three leading operators have stopped selling the iPhone. Russian is a difficult market for any foreign company, but Apple has found it more difficult that other market players. The government doesn’t allow subsidies on Apple products, which means that, in Russia, an iPhone can cost anywhere from $900 to $1,000.

According to recent reports, VimpelCom has stopped offering the iPhone, blaming harsh terms and ‘draconian contracts’ as the primary reason. The company has, in-fact, signed a deal with Samsung to offer the Galaxy series. This makes VimpelCom (NASDAQ: VIP) the third Russian carrier to dump Apple products, after MTS and MegaFon. According to Rethink-Wireless, these three players control 80% of the Russian cell phone market.

This opens up a substantial opportunity for players like Microsoft (NASDAQ: MSFT) to find a stronghold in the region. Reports indicate that Windows 8 is gaining up on market share vacated by iOS. Due to lack of carrier marketing of iPhone products, the market share of Windows has increased to 8.3% overtaking Apple’s 8.2%.

The reaction of Apple executives will determine the future of the iPhone in Russia. If they negotiate and are willing to reduce pressure on carriers, the situation in Russia might improve, but it will still instigate rebellion in other parts of the world.

European Woes

Apple is also under scrutiny in Europe for anti-competitive behavior. According to the commission, it is investigating the iPhone distribution practices of Apple after complaints from industry players. As part of the preliminary investigations, it has distributed a questionnaire among EU carriers. The aim of this questionnaire is to gather more information on Apple’s contracts with EU carriers, and ascertain if these contracts make it difficult for other manufacturers to compete with the iPhone.

A European Commission probe is not something to be taken lightly. The commission was involved in a drawn out battle with Microsoft in the late 1990s and early 2000. The software giant was also accused of similar charges and was forced to pay billion in fines and significantly change its policies. A negative outcome in this case will force Apple to loosen its grip on EU carriers. If this preliminary probe turns into something substantial, Apple will not only face more global scrutiny but will also be forced change its contracts with carriers. Apple record is not good in this regard, only last year it settled an antitrust probe by EU into e-book pricing.

Chinese Trouble

After the launch of the iPhone 5, Apple shares slid from above $700 to below $500. A major reason behind the rise to $700 per share was the very high sales expectations from the iPhone 5. The ‘analysts’ predicted that the device will maintain its growth trend despite highly saturated EU and American markets. Almost 60% to 70% of this growth was supposed to come from China. The reality came crashing down when China Mobile refused to sell the device.

The negotiations have been going on for years but have always stalled due to one reason or another. The real reason is none other than the total domination of China Mobile on the Chinese market. It actually has no need to accommodate Apple and its high subsidies. Therefore, until China Mobile actually feels that its subscriber’s base is threatened and that to by a rival carrier using iPhone as its competitive advantage, a deal between the two is highly unlikely.

Bottom Line

With the recent announcement by VimpelCom, the big three Russian carriers have dropped the iPhone. This is a serious blow to iPhone’s Russian sales and will benefit Windows 8. Microsoft’s OS has already surpassed Apple in the Russian market. The EU antitrust probe into iPhone distribution practices can become a massive headache for Apple and can force the company to reconsider its contractual agreements in the region. Meanwhile, China Mobile deal remains elusive as ever. There are indications that a deal between the two will not materialize in the near future. In the current scenario, it doesn’t make sense for China Mobile to sign on with Apple and compromise on margins.

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Mohsin Saeed has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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