China Mobile Haggles with Apple for iPhone Contract, Meanwhile Sells Wi-Fi Service

China Mobile (NYSE:CHL), the world’s largest telecom service provider with 634 million users as of September 2011, has succeeded in finding alternate ways to sell the Apple‘s (NYSE:AAPL) iPhone on its network even without a deal being struck between the two companies for offering its 3G mobile services. The company has managed to sign up 5 million users of the smartphone in the last 4 months by offering attractive Wi-Fi services for 2G phones instead. Currently, competitor China Unicom (NYSE:CHU) is the exclusive official carrier of the iPhone in China.

China Mobile operates its network on the TD-SCDMA technology, a next-generation technology which is still in the developing stage and is limited to China in its usage. It has recorded a high level of sales without the official support of the iPhone running on its technology, and we believe this indicates the underlying demand for that will boost the outlook for both Apple and China Mobile assuming a deal is reached. ^[1]

See our full analysis for China Mobile’s stock here

Increasing phone sales and decreasing margins

Smartphone penetration was around 15% in China in 2010, but with increasing number of smartphones being launched in the market, we expect penetration to grow quickly. To promote iPhone sales, China Mobile is offering gift cards of values as high as $441 to its users who are willing to prepay for its Wi-Fi services to surf the web.

What makes the company different from its competitors is that it does not sell these smartphones at subsidized rates. It has instead bundled iPhone sales with other attractive services, targeting those people who are willing to buy the iPhone at full price. Customers that don’t flinch at paying full price for iPhones will likely be heavy data users and China Mobile wants to tap this growing customer base despite not having its 3G iPhone contract fully secured.

While in the near term these promotional activities imply that gift cards and advertising will keep pressure on the company’s margins, the longer term prospects for data usage and mobile Internet look enticing as these are the largest growth areas for China Mobile and account for a large part of our $58 price estimate. Moreover, iPhone users are widely recognized as heavy data users and bring a higher life-time value to carriers, which is one reason Sprint justified its capital outlay.

Apple’s growth potential in China is immense

In Apple’s most recent quarter, it clocked record sales of $4.5 billion in China, or 16% of total sales. In fiscal year 2011, revenues in China grew to $13 billion, or 12% of total sales, up from about $3 billion, or 2% of total sales in 2009. As CEO Tim Cook said in the earning call, this is Apple’s fastest growing region by far and Apple is doing everything it can to promote its brand in China.

Since the iPhone accounts for over half of Apple’s stock according to the Trefis analysis and provided that Apple and China Mobile (NYSE:CHL) will reach a deal given how valuable this is to both parties, the iPhone has the ability to move the stock for both companies as Chinese buyers snap up new phones.

Understand How a Company’s Products Impact its Stock Price at Trefis.

1. China Mobile Skirts Apple to Add 5 Million IPhone Users: Tech, November 1, 2011 [↩]