China Mobile (NYSE:CHL) said at a shareholder meeting May 16th that it is currently in talks with Apple (NASDAQ:AAPL) to offer the iPhone on its network.  However, it declined to predict as to when it expects to close the deal. This is most likely to do with Apple’s (as well as partners’) usual reticence with regards to the launch date of the next-generation iPhone.
Apple has already signed deals with both China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA) to sell the iPhone. With China nearing a billion strong mobile subscriber base, signing a deal with China Mobile will present Apple with a huge opportunity to maintain its current high growth rate. China Mobile has a huge mobile subscriber base of more than 665 million, dwarfing its U.S. counterparts Verizon (NYSE:VZ) and AT&T (NYSE:T) by more than 6 times.
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iPhone May Soon Arrive on China Mobile
China Mobile’s proprietary TD-SCDMA 3G network has been a huge stumbling block in the way of an Apple-China Mobile iPhone deal. The network is incompatible with most smartphones currently available in the market, including the iPhone. This requires Apple to come out with a specially crafted iPhone for the carrier’s proprietary network, and this has proved to be a huge deterrent.
However, with Qualcomm’s recent announcement of a baseband chip that supports not only China Mobile’s 3G network but also its 4G TD-LTE network, which is still under trials, it will finally be possible for Apple to release an iPhone on the world’s largest carrier. (see Qualcomm Paves the Way for an Apple-China Mobile iPhone Deal)
China Mobile has so far managed to overcome its 3G shortcomings by building out a nationwide Wi-Fi network. But the unavailability of an unsubsidized iPhone on the nation’s largest wireless carrier is a serious deterrent to widespread 3G adoption. The fact that as of March 2012 China Mobile had still managed to add about 15 million iPhone customers, customers who not only forked out the full price of the iPhone but also have had to make do with China Mobile’s 2G network, is testimony to the huge untapped potential.
Upside to Apple from a Bigger China Play
Our estimates for Apple’s market share do not take into account the availability of the iPhone on China Mobile’s network. However, should it happen, the upside could be huge.
China Mobile had 10 million iPhone users in October 2011. In 4 months, it added another 5 million, implying an addition of almost 1.25 million iPhone users to its network each month. For 4 months prior to October, China Mobile added 5 million iPhone users. So we can assume that the rate of adoption of unsubsidized iPhones on China Mobile’s network has been fairly constant.
Assuming that China Mobile gets the iPhone in October this year when the iPhone 5 is released, and that it starts off by selling the subsidized version to an additional 1.5 million users every month, it could sell around 5 million additional iPhones in the last quarter of 2012.
Going forward, it could sell around 25 million additional iPhones in 2013 at a little higher than the 2012 rate. For arriving at the long-term average sales, we look at AT&T’s percentage of iPhone activations to total retail subscriber base for 2011. AT&T had about 17.5 million iPhone activations in 2011, and it ended the year with more than 76.5 million subscribers, taking the required percentage close to 23% in about 4 years for which it has had the iPhone.
If China Mobile manages to reach this percentage by 2018, it could be selling close to 200 million additional iPhones a few years out. In our analysis, we are taking a more conservative estimate of 120 million additional iPhones by 2018 to arrive at a price estimate of $825, an upside of about 18% to our current $700 price estimate. This is just the effect of an increase in market share for Apple’s iPhone. However, if carrier subsidies cause Apple to maintain its current pricing, as opposed to the declines that we show, the upside could be much higher.
You can move the iPhone pricing trend line in the chart below to make your own forecast for Apple’s value.
Our assumptions are contingent on China Mobile actually leading the 3G race in the same way as it has dominated 2G. The current 2G scenario is heavily biased in favor of China Mobile, but its 3G advantage is not so significant. If China Mobile is unable to leverage its huge 2G lead and turn it into a 3G advantage, the scenario may not play out as described above. Having China Unicom and China Telecom in the bag may help Apple cover a bit of lost opportunity in China Mobile, but for the China story to play out, its largest wireless carrier must deliver.Notes:
- China Mobile in Talks With Apple on iPhone Cooperation, Bloomberg, May 16th, 2012 [↩]