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The iPhone MOQ

[Kaoru] Kato, president of NTT DoCoMo Inc., said that the firm would want to add the iPhone to its lineup of serviced smartphones if it could form a mutually beneficial contract with Apple, Inc.

Apple requires that carriers servicing its devices sell a fixed amount per year. Katō said that his company could handle such quotas if iPhones accounted for approximately 20%-30% of its overall smartphone sales.

via NTT DoCoMo President Interested in Servicing iPhone — BrightWire

When thinking about an iPhone launch, especially with a new operator, the crucial question is what is the minimum order quantity (MOQ). Some of the iPhone production is sold direct (as in the case of orders coming from Apple’s online store) but the majority of units are sold via operator who order in batches.

This issue came to light when Sprint’s order was leaked in late 2011.  I discussed the order size at the time and put it in context. I concluded that Sprint MOQ was on average 7 million/yr., ramping with 4, 6, 9 and 12 million over a four year period.  I concluded that this was not a particularly aggressive gamble.

Data published since then shows that Sprint actually sold 6.3 million during the first year, well ahead of my expected minimum order of 4 million and above even the expectations for the second year of sales. So far then Sprint and Apple gauged minimum demand quite accurately.

I also showed that the Sprint MOQ was probably indexed off their sub base. I suggested that, based on subs data at the time, Sprint was committing to roughly 13% of its subs buying an iPhone every year. This was indexed off the data showing that 17% of AT&T subs were buying iPhones every year and 10% for Verizon. (I also assumed that this run level would be ramped over time).

The updated totals for the 12 months ended October 2012 are 19% of AT&T subs purchased an iPhone, 12% for Verizon and 12% of Sprint. The performance is shown in the following graph:

Screen Shot 2013-01-17 at 1-17-3.33.10 PM

Which leads us to think about how the MOQ for the iPhone is calculated. If we assume Sprint and Verizon performance is typical it would imply that an operator like DoCoMo would be required to purchase iPhones at the rate of about 10% to 12% of its sub base each year, modulated to some degree by a ramp.

NTT DoCoMo had 60.7 million subs in September 2012. 10% is about 6 million. Is Mr. Kato’s quote above of 20%-30% of smartphone sales consistent with this?

In an earlier interview (in July) Mr. Katō also stated that the target for smartphone sales in the year to March 2013 was 13 million. 30% of that would be 4 million units.

This suggests that the iPhone MOQ for DoCoMo is only about 6% of subs. (4 million) Perhaps this is the basis of negotiation for an iPhone deal. Apple may have held out for 10% subs/yr. with Sprint on the basis of performance of the iPhone in the US but might be willing to settle for 6% subs/yr with DoCoMo, at least for the first year.

The MOQ figure as percent of subs for China Mobile would also be an interesting point of debate.

 

  • http://www.isophist.com/ Emilio Orione

    In Measuring iPhone 5 vs. iPhone 4S availability you showed that the “potential iphone buyers”, as the number of subs addressed by iPhone-carrying operators, is shy of 3 billions for the iPhone 5.

    Assuming all carriers have multiyear contracts with 6% MOQ of subs imply staggering numbers. MOQ should be different case by case.

    • cellojoe

      200 million phones sold this year would be 6.67percent of the 3 billion accessible

      180 I think is the most current estimate I’ve heard from Wall Street Would be 6%

      If we assume 6% is where they begin the negotiations with a new carrier Those prognostications look doable and surprisingly intelligible.

      • cellojoe

        I would like some thoughts on the “portability’ of other apps into RIM’s ecosystem. Those heralding the resurrection make much of it.

      • http://www.isophist.com/ Emilio Orione

        That is exactly my point. If 6% is the base, that in a big market like the USA has grown to 10/12%, and if Apple is able dealing like it is said you have 200 million minimum iPhone 5 already sold at launch by contract with carriers.
        If you add iPhones sold directly by apple without contract you are well higher than current estimates, if MOQ minimum is variable, depending on carriers, numbers can be adjusted to meet estimates.

  • Walt French

    On a related point, suppose similar terms between Apple & Verizon. Further, suppose Verizon finds Android sales much more profitable and manageable over time, but want to have Apple to prevent defections of people who specifically want an iPhone.

    Verizon can then calibrate its marketing (presentation) of the iPhone so that they capture people who specifically want one, but once people are inside the stores, tilt strongly towards Androids. I haven’t spent any time sampling the retail presence, but from visually scanning the stores that I walk by, this explanation best fits to the heavy Android emphasis inside, with an iPhone window sign and/or street sign in front.

    Over many years, Apple has gotten a rep / the rap of being disinterested in truly “partnering” with other firms. Stories about Apple’s 2005-ish approach to Verizon suggest that this reputation informed Verizon’s disdain for a possible tie-up. Looks to me that your MOQ insight defines a very transactional form of business relationship.

    • http://www.isophist.com/ Emilio Orione

      Verizon can have a heavy Android emphasis by its own, but also Samsung’s marketing money has to do with it. 16 billion dollars buy a lot of emphasis.

      • Walt French

        well, i’m talking about store displays for “Droid.” Samsung may be a marketing powerhouse, but Verizon really seems only interested in its own branding, reinforcing the idea that the network is the computer, not vice-versa.

    • http://twitter.com/WalterMilliken Walter Milliken

      I’m sure Verizon deals with Apple with all the enthusiasm of a cat owner presented with a half-eaten mouse — it’s something you have to deal with, but you sure wish you didn’t. In my opinion Hell must’ve frozen over when VZ started selling the iPhone — they just don’t let anyone but VZ control customers. Apple’s approach to the carrier relationship is totally heretical to their mindset.

      • Walt French

        Heh, two nights ago we got maybe the last 1/6 of a large rat. But left on the patio, and the tail + bits disappeared on their own.

        So these things can be dealt with. Which raised the idea that long ago, maybe Verizon put the minimum in as a counter-proposal to some Apple idea about earnest money. VZW would’ve known they could deliver the users at a very manageable cost—zero, essentially—and happily have allowed itself to be forced into the deal.

        Now, I’m not a player in this business; I have no idea what fr’instance RIM or Samsung agrees with a carrier. Each deal has a different power relationship, and the stakes are high enough to ensure careful negotiations. My guess is that this term is in lieu of Apple getting a higher percentage of the retail sale and/or monthly data plan; those latter two strongly incent the carrier to find a replacement for the iPhone, while MOQ would almost encourage HIGHER sales of Apple gear. The roadblock now is for Apple to convince carriers that they will continue to be the first-demanded phone, so the MOQ never bites.

  • gprovida

    Aside from predictable production, this may also be a strategy to mitigate seller over promoting iPhone alternatives.

  • http://sharonsharalike.com/ Sharon Sharalike

    The MoQ, coupled with strict pricing and no co-marketing agreements, means Apple determines what it wants out of a relationship and is not concerned about the “market share” much above that. They fully realize that others will offer spiffs and co-pays and other concessions to move their phones. And Apple simply says “You do what you want. You burn through your marketing budget. We’ll take this slice at high margins. That’s the deal.”

    • Tatil_S

      The latest iPhone ads on TV show an Apple logo immediately followed by a carrier logo. During one football game they use one carrier’s logo and during another game it is another carrier. I don’t know whether carriers are contributing to the ad buy or Apple is fulfilling some kind of marketing commitment.

  • Danny Mulligan

    A MOQ could “de-risk” production investments, but given their cash position Apple is well able to bear this risk by themselves. An interesting question would be – does Apple have MOQ’s for products sold through non-operator channels? I have no idea if they do or not, but if they had a MOQ for iPhones, but not for iPods, iPads & Macs that would suggest that an MOQ is not about production risk.

    There are two things that I think a MOQ might be about. 1: force operators to commit to the iPhone, and 2: force operators to stand by Apple in the event of a product stumble.

    1. Force operators to commit: Some operators want an iPhone distribution deal because of a slow but steady stream of some of their most profitable subscribers to other operators to get an iPhone. (I suspect that this was a factor for Verizon and Sprint). Such operators might be tempted to ‘skim’ their subscribers, offering the iPhone only to high-end or at-risk subscribers. They would then offer generic phones to the bulk of their customer base. An MOQ effectively disallows this behavior, and forces them to offer the iPhone broadly.

    This is an other spin on the “am I an AT&T/Verizon/Vodafone/DoCoMo/etc customer, or an iPhone customer?”. If the operators are able to force generic handsets on their customer base, this question is more likely to be answered in the operators’ favor.

    2. Insurance against a product hiccup: If Apple stumbles with a product (e.g. antenna-gate, or maybe one day their equivalent to Microsoft’s Vista – unlikely but possible), then the operators could use that as an excuse to shift their customer base away from iPhones to something else, and Apple might never get these customers back.

    This speaks to the “am I an operator customer or an Apple customer?” point above – the operators will surely be unhappy with becoming too dependent on Apple, and they would want to reduce that dependency. If a single operator tried to fix this problem by themselves, then customers would punish them in the marketplace, but if all of the operators could coordinate themselves around a perceived iPhone problem, then they might be able to pull it off. Such a problem wouldn’t have to be very real (think antenna-gate), it just would have to be something plausible to the general public.

    And again, a MOQ solves this problem for Apple. Operators are highly motivated to work through the problem with Apple, rather than use it as a club to beat Apple with.

    Aside: Along with an MOQ, I’d be very surprised if operator deals didn’t also have an opposite but equivalent minimum delivery commitment (MDC?) from Apple. When Apple has a hot new product, no operator would want their competitor to have better supply from Apple. If there was a MCD, I’d bet it would be scaled to the MOQ – make a bigger commitment to Apple up front, and you get bigger deliveries of hot products at launch.

  • suddy

    Horace,

    This is excellent insight that you have presented and in line with Asymco’s highly insightful analysis. You left me with a “hook” too tempting not to bite – that of MOQ for China Mobile with 700 Mil Subs.

    I think that can be a post(s) by itself.

    1. As regards to DoCoMo, what is the nature of contacts? Does Japan / DoCoMo have a carrier subsidy model just like to US?

    2. If No, is that why they are targeting 6% vs. 10% – 12% ? due to lack of Subsidy?

    3. As regards China, if you can layer in the GDP per Capita for China to extrapolate the adoption rate for China Mobile, along with “lower price point” iPhones specifically for the China market that would be great.

    I would guess that China Mobile and Apple are not just negotiating on MOQ, but also on

    1. The entry price of an iPhone,

    2. Changes to the contract structure (introducing a with carrier subsidy model?) and

    3. Network speeds – cheaper iPhones would be on slower – 3G network vs. iP5 & above would be on 4G.

    Would love if you could elaborate based on your knowledge and field experience in Mainland China.

    Suddy

    • Javbw

      DoCoMo and the rest of the Japanese carriers operate on a subscription model.

      DoCoMo previously would not carry the iPhone because Apple would not allow them to pre install their portal application (iMode) – their extensive, but very old) email/web/services system that grew up with Japanese Keitais – Internet connected quazi-smartphones that used specialty apps and services made just for them. The Japanese refer to modern touchscreen phones like the iPhone or android phones as ”smartphones” to make the distinction.

      This was the total deal-breaker a year or so ago, and before that, it was because their network was incompatible with all GSM phones (CDMA).

      Softbank’s rise in their customer base (along with AU) this winter season was matched by the biggest 1 month drop in subscribers for them in years and years, due to the iPhone 5 launch ( they are everywhere over here now).

      They are going to bite the bullet, and offer the iPhone – but this complaining about MOQ is them just whining about something because they are still smarting over this “loss” to Apple.

      • suddy

        Thanks for your helpful insights !

      • Magnus

        It has been possible to use iPhones on the Docomo network since the iPhone 3G was released, i.e. about 4 and a half years. I am in fact using an iPhone 3G right now on their network.

  • Boxerconan

    Horace, I really enjoy your blog and podcast.

    The reason why Docomo does not carry the iPhone is partially due to its relationship with the government. There are quite a few people believe that Docomo has been told not to carry the iPhone by the Government. As you may know, Docomo used to be a semi-governmental entity, and there are lots of execs who used to work for the government as well. If Docomo sells the iPhone, what will happen to Japanese domestic smartphone makers? The iPhone has been disruptive enough. Docomo’s network is still believed to be the best. There are the majority of Docomo subscribers who are not willing to switch to Softbank or Au because of its better network, however, there are lots of them who also want the iPhone (including my friends in Tokyo). In addition, Docomo keeps saying “we don’t want to be a plumber”. This means they are so proud that they could tell phone makers what to do, but they are not ready to be told what to do.

    However, Japanese government needs to understand that more than half of the components for the iPhone are made in Japan. Apple will order IGZO panels from Sharp which will probably save Sharp.

    • hsakawa

      FYI, NTT DoCoMo has been strongly pushing Samsung’s handsets, along with those from Sony, Sharp, Fujitsu. It recently added LG’s into its portofolio. Thus, IMO, a possibility of JPN government’s intervention for DoCoMo’s decisions in this regard, is rather thin… especially when considering the fact that two countries (Japan w/ South Korean) are quarreling over a territorial disputes.

  • http://twitter.com/WalterMilliken Walter Milliken

    Horace, I found the label “unactivated” in the chart legend rather confusing, though from context (and the chart title) it appears to actually mean “non-iPhone subscribers”.

  • James Hummel

    Thanks for bringing this subject up. As I live in Tokyo I would like share a few observations. Imagine NTT Docomo as the equivalent of Encyclopedia Britannica of the 1960’s and 70’s, with the huge staff, high margins, a monopoly on the gates of communication and an IBM style company song.

    With that said. NTT group likes to call the shots and is not comfortable with anyone telling to it to do anything. The motto “it’s our way or the highway” rings a bell.

    I think NTT Docomo is terrified of the iPhone ecosystem and value to the end user as it resets customer expectations worldwide. Many Docomo subscribers would use them mainly as a “dumb pipe” internet connection. Combine that idea with a free OTT voice,txt app like LINE, Kakaotalk, Whatsapp,Facebook and the (¥40) 45 cents a minute voice has a hard time competing with free.

    Note. In Japan there are no nights and/or weekend free plans like in America.

    In the meantime there are two carriers in Japan that offer the iPhone 5. All is not lost.