Apple Inc. (AAPL) is missing out on a chance to court as many as 2.8 billion new smartphone customers, many of them in Asia, as wireless-service providers balk at conditions imposed by the iPhone maker and drag their heels in signing on as partners.
Apple has announced fewer than a dozen new wireless-service providers to sell the device since September 2011, leaving the total at about 240. Holdouts represent billions of would-be subscribers in countries such as China, Japan, India and Russia, said Horace Dediu, a market analyst who runs Asymco.com. Samsung Electronics Co. (005930), Apple’s biggest smartphone rival, sells devices through almost all of the world’s 800 carriers, Asymco said.
China Mobile Ltd. (941), the world’s biggest phone company, and NTT DoCoMo Inc. (9437), Japan’s largest mobile carrier, are among providers that haven’t agreed to carry the iPhone, citing the high costs of subsidies needed to make the device affordable or other terms they find unacceptable. The slowdown in adding new partners is contributing to stagnating iPhone sales growth, giving Samsung-led competitors a potential advantage and putting pressure on Apple to deliver a cheaper device or make other margin-threatening concessions.
“The narrative has been focused on the consumer demand, and the narrative needs to shift to the operator,” said Dediu, a former in-house analyst for Nokia Oyj. (NOK1V) “Apple has run out of the kinds of operators that will say yes to them.”
As Cupertino, California-based Apple sells fewer iPhones and more of its less-profitable products, its gross margin also has narrowed -- to 37.5 percent last quarter from 47.4 percent a year earlier. The stock rose 1 percent to $449.98 on May 3 in New York.
Apple’s dearth of new carriers was evident last quarter, when iPhone sales increased 7 percent, to 37.4 million units, the smallest gain since the device was introduced in 2007 and less than the 36 percent growth for the total smartphone market, according to Strategy Analytics. In the same period a year earlier, iPhone sales jumped 88 percent.
The iPhone slowdown has broad consequences for Apple, which gets more than half its sales from the product. The stock has declined 36 percent since reaching a peak in September.
Not all carriers can currently handle the iPhone. Of the roughly 800 global operators, about 500 have the network capabilities needed for the device, according to Strategy Analytics. That number is quickly increasing, said Neil Shah, an analyst at the research firm.
Before getting on board with Apple, new carriers must weigh the company’s requirements, such as guaranteeing a minimum sales tally, as well as the price of the phone, currently above $600 before subsidies. At the outset, Apple was able to exact lucrative terms from partners such as AT&T Inc. (T)
While that business model worked as the iPhone grew in popularity in developed regions, such as the U.S., Europe and parts of Asia, those markets are becoming saturated, with smartphones accounting for more than half of global handset shipments.
The regions that present the biggest growth opportunities are developing nations such as China or India, where the price is often too high.
“The carriers that haven’t gotten the iPhone are in markets that need a lower-priced phone,” said Walter Piecyk, a technology analyst at BTIG LLC. “A $600 phone doesn’t cut it for 80 percent of the wireless market that is prepaid -- you’re talking about people with monthly bills of $10 to $11.”
Apple has been developing a lower-end iPhone that may be introduced as early as this year, people familiar with the company’s work have said. The company also has been cutting the price of older iPhone models to appeal to those with less to spend. Apple may be willing to sacrifice profit margins if it can gain market share and introduce new services, such as tools that enable payments with a mobile device, Piecyk said.
Trudy Muller, a spokeswoman for Apple, declined to comment.
Apple places sales quotas and other requirements on carriers that sell the iPhone, which may make it too expensive for some providers, Dediu said. Those potential partners must determine whether taking on those obligations is worth the benefit of offering a device that’s popular with customers who typically spend more on monthly data plans. For carriers that cater to customers who can’t afford costly data plans, it may not be a good bet, he said.
“The product has one value proposition for consumers and another one for operators,” Dediu said.
At the same time, carriers have been working to reduce reliance on Apple by forging tighter partnerships with competitors such as Samsung, which offers a variety of devices in different styles, screen sizes and prices. Some manufacturers customize handsets, including putting a carrier’s name on the device -- something Apple won’t do. That’s giving telecom providers more leverage to negotiate with -- and reject -- Apple.
“Carriers are starting to question Apple’s pricing strategy and are supporting multiple other platforms,” said Shah at Strategy Analytics. “They no longer need Apple.”
Apple remains popular on networks where the iPhone is available, accounting for more than half of smartphone sales through carriers such as Verizon Wireless. It also accounts for about 70 percent of all the profit generated in the handset business last year, according to Canaccord Genuity.
China Mobile, the world’s largest mobile-phone operator, is the most prominent among carriers not offering the iPhone. Technical elements of the China Mobile network make it incompatible with the iPhone, and Apple hasn’t made the required adjustments.
China Mobile Chief Executive Officer Li Yue said late last year that a deal must be mutually beneficial to both companies - - a reference to Apple’s strict carrier terms.
“Besides the technical issues, the business model and benefit sharing still need further discussion,” Li said at the time.
“On this topic, there is currently nothing new we can reveal,” Rainie Lei, a Hong Kong-based spokeswoman for China Mobile, said in an e-mail in response to questions about the status of talks with Apple on offering the iPhone.
DoCoMo hasn’t yet decided whether to offer Apple Inc. (AAPL)’s iPhone, Kaoru Kato, chief executive officer of the Tokyo-based carrier, said in February.
Apple’s closed ecosystem makes it harder to integrate into DoCoMo’s plan to link devices and services, he said.
For smaller wireless-service providers, teaming up with Apple can be a double-edged sword. U.S. Cellular (USM) signed on last week to offer the phone after agreeing to sell $1.2 billion worth of handsets over three years. The company had long said that the handset costs too much; yet, not having the iPhone was costing it customers. Telefonica Czech Republic dropped the iPhone because it couldn’t afford the subsidy.
Introducing a less-expensive iPhone would help appeal to more customers and carriers, said Benedict Evans, an analyst with Enders Analysis in London. Apple could sell 50 million iPhones a quarter if it introduced a cheaper model, he said. Priced at $200, with a 30 percent profit margin, the new product could generate at least $2 billion in profit a quarter, Evans said. The company brought in $9.55 billion in profit in the most recent period.
Whether it rolls out a lower-end phone or offers more favorable terms, Apple will need to find a way to reignite iPhone demand and reach more customers without sacrificing too much of its industry-leading profit margins. The urgency for Apple to be more flexible on terms is rising as Google Inc.’s Android gains ground, Shah said.
“Apple didn’t see any reason before, but now it has to expand because Android is growing faster,” he said.
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