Laying the infrastructure
Russia’s infrastructure has also been a tall order to overcome for Apple, because much of the country is still running on 2G technology. Even now, only Russia’s most densely populated cities are running on 3G wireless technology.
The cellular-phone market in Russia is dominated by three operators: Mobile TelesSystems, or MTS, with 71.23 million subscribers as of Dec. 31; MegaFon, with 62.57 million; and VimpelCom Ltd (ADR) (NYSE:VIP), with 56.11 million. Beyond these three, Rostelecom, Tele2Russia, SMARTS Group, and Cellular Communications Motiv combine for 40.5 million subscribers. What this has led to is a cell-phone saturation rate of 161.3%!
Such a high rate has both positive and negative implications. It means that with most people owning more than one cell phone, growth prospects are limited for existing service providers such as VimpelCom Ltd (ADR) (NYSE:VIP) and MTS. But it also means that as the wireless infrastructure in Russia is improved, these service providers can deliver an entirely new line of sales through upgrades — possibly to Apple iPhones.
The reality of seeing this happen is actually quite good. In 2011, Yota signed a deal with many of the major Russian service providers to deliver 4G LTE-capable connectivity for mobile devices to 180 cities in Russia, servicing more than 70 million people, by 2014. This would greatly benefit Apple, which has been held back by Russia’s slow transition to 3G and 4G networks, and could help to push Nokia — which has historically dominated the 2G and 3G networking markets — out of the picture.
Apple would make how much?
Another way to look at this is to consider what would happen if Apple’s market share in Russia resembled its global market share of 25.1%. Extrapolating Apple’s “approximated” guess by MTS of 7.2% market share, this would mean that Apple phones are being used by about 16.6 million Russians (the overall market encompasses 230.5 million people). By simply bringing its market share up to its global average, Apple would sell an additional 41.9 million iPhones in Russia alone. If these phones were packaged with a contract at the current U.S. price of $199 each, Apple would be looking at $8.3 billion in additional revenue. Understandably, the iPhone is actually much more expensive in Russia, because few service providers subsidize its costs, but just imagine what would happen if they did even to a partial extent. That’s what I call a blaring opportunity!
With Apple’s easily recognizable brand image and history of innovation, it shouldn’t be difficult to more deeply penetrate the Russian market beginning in 2014, when 3G and 4G networks proliferate. Providers such as MTS and VimpelCom are struggling to find pathways to growth, and a symbiotic “you scratch my back and I’ll scratch yours” type of arrangement could help all parties involved.
The article This Is Apple’s Next Big Opportunity originally appeared on Fool.com.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of, and recommends, Apple and Google.
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