December 29, 2013, Laredo Times
A long-sought deal to sell the iPhone through China Mobile should enable Apple to boost its profits and build customer loyalty in an important, growing market.
China Mobile, the world’s largest wireless carrier, boasts more than 750 million mobile accounts, an audience that had been mostly walled off from the iPhone until Apple and China Mobile hammered out a multi-year sales agreement after years of thorny negotiations. The companies announced the deal Sunday (Monday in China).
Analysts doubt the China Mobile breakthrough will prompt Apple Inc. to introduce an extremely cheap iPhone as the Cupertino, Calif., company clings to a higher standard of quality. That approach is likely to ensure that smartphones running Google’s Android software remain the top-selling devices in China.
Even so, investors are pleased to see Apple fill a gaping hole in the iPhone’s sales network. Apple’s stock rose more than 3 percent Monday, propelled by analysts projecting that the China Mobile deal could lift iPhone sales and Apple’s earnings by more than 10 percent next year.
But even with China Mobile Ltd.’s vast state-owned network, marketing power and massive customer base, the iPhone still faces significant hurdles in the world’s most populous nation.
Apple’s smartphone is already available in China through two smaller carriers, China Telecom, and China Unicom. Although it is popular with well-heeled Chinese consumers, the iPhone is losing market share to lower-priced smartphones from Samsung and local brands. Most of the less expensive iPhone rivals rely on Android, which Google Inc. launched five years ago as an alternative to Apple’s then-dominant smartphone.
Now, more than 80 percent of the smartphones sold around the world run Android, compared with 13 percent for the iPhone, according to the research firm International Data Corp.
That pecking order isn’t likely to change, even if analysts prove correct in their predictions that the China Mobile deal will help Apple sell anywhere from 10 million to 40 million iPhones next year. Those numbers should help Apple increase its iPhone sales volume from 150 million devices in its last fiscal year, but it won’t make that much of dent in overall market share. More than 1 billion smartphones were sold in 2013 alone, including 528 million in Asia, according to IDC.
"China Mobile and Apple working together isn’t fundamentally going to be a game changer in the smartphone market," said Forrester Research analyst Frank Gillett.
In September, Apple did introduce a lower-priced iPhone called the 5C, but it’s only $100 cheaper than the high-end 5S. Apple and China Mobile didn’t announce pricing or the terms of their agreement. The average price of iPhones in Apple’s most recent quarter stood at $577, which is likely to be more expensive than most Chinese consumers can afford.
Although Apple might eventually introduce a slightly lower priced iPhone designed especially for the Chinese market, Gillett said the company "is never going to go chasing the bottom of the barrel."
The iPhone 5S and 5C will go on sale in Apple and China Mobile stores beginning Friday, Jan. 17. China Mobile customers can register for phones starting Wednesday.
There are still plenty of higher-income China Mobile customers that have been pining for the iPhone, especially the 5S in a gold-plated color that is considered a sign of prestige in China. A key issue is whether it leads to additional sales or only prompts existing iPhone owners to switch to China Mobile.
The timing of the China Mobile deal is ideally set for a surge in iPhone sales. The release will come just two weeks before China’s Lunar New Year holiday at the end of January, a big gift-buying season.
But any lift that Apple gets by becoming China Mobile’s new luxury phone could quickly fade, said another Canalys analyst, James Wang.
"We expect this advantage can only last three months and Samsung will bring out its next flagship model soon," he said.
Samsung also caters to less-affluent households in China by selling its line of smartphones through a mix of carriers with prices as low as 1,000 yuan ($150). Other smartphone makers, including Huawei and Xiaomi, also sell cheap smartphones in China.
Apple has been selling the iPhone primarily through China Mobile rivals China Telecom Ltd. and China Unicom Ltd., which have more than 450 million accountholders combined. China Unicom pays 2,500 yuan ($410) of the iPhone’s 5,499 yuan ($900) cost in exchange for a customer signing a two-year contract to pay a minimum of 186 yuan ($30) per month.
Analysts believe China Mobile will have to match those terms to achieve significant sales.
The existing sales channels haven’t been enough to prevent Apple’s market share in China from slipping. Apple’s share of China’s smartphone sales declined to 6 percent in the third quarter from 8 percent a year earlier, according to research firm Canalys. Meanwhile, Samsung’s share expanded from 14 percent to 21 percent.
About 50 million iPhones have been sold in China in the past 2 1/2 years, according to analyst estimates. That translates to about 15 percent of the nearly 313 million iPhones that Apple sold during that span.
Apple CEO Tim Cook sees much bigger things to come. Earlier this year, he told the official Xinhua News Agency in January that he expects China to surpass the United States as the iPhone’s biggest market.
Apple’s stock rose $18.18, or 3.3 percent, to $567.20 in afternoon trading Monday.
Bringing China Mobile on board took Apple years to pull off. The talks between the two companies began in 2009, China Mobile President Li Yue said last year.
Apple’s negotiating position likely improved as China Mobile’s subscriber growth slowed and gave the carrier more incentive to add the iPhone to its lineup, Cantor Fitzgerald analyst Brian White wrote in a Monday research note.
"This has been the most difficult carrier agreement for Apple to negotiate in its history," Write said. "However, we believe the opportunity for the iPhone to expand its reach within China Mobile’s wireless subscriber base will prove to be well worth the wait."