In the lead-up to the iPhone 5 launch, a number of rumors had swirled the web concerning Apple’s (NASDAQ:AAPL) possible deal with China Mobile (NYSE:CHL), the world’s largest wireless carrier by subscriber base. With close to 700 million wireless subscribers, a huge chunk of which are still on 2G, China Mobile presents Apple with an immense opportunity to tap China’s burgeoning smartphone market. However, a deal with China Mobile required Apple to come out with a specially crafted iPhone for the carrier’s proprietary network, which proved to be a huge deterrent for the two giants to come together.
All that may change however with the iPhone 5 which, as an iFixit teardown reveals, has Qualcomm’s MDM9615 baseband for LTE support. The chipset co-incidentally also supports China Mobile’s 3G network, paving the way for the long awaited deal between Apple and China Mobile. This is momentous for both companies since, without the chipset, investors would have had to wait until China Mobile launched the LTE network it is currently trialing to see Apple release the iPhone on the carrier. Apple will still have to work out the terms of a subsidy deal with China Mobile but, looking at what’s at stake, we believe it is only a matter of time before that happens. Apple has already signed deals with both China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA) to sell the iPhone in China. A deal with China Mobile would not only complete the China puzzle but also help Apple maintain its high current growth rates, leaving another 20% upside to our current $700 price estimate.
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Upside to Apple from a Bigger China Play
Our estimates for Apple’s market share currently do not take into account the availability of the iPhone on China Mobile’s network. However, should that happen, the upside could be huge.
Although China Mobile doesn’t officially sell the iPhone, it had 15 million iPhone users subscribed to its 2G network as of March 2012. In October 2011, the carrier had 10 million iPhone users, implying an addition of almost 1.25 million iPhone users to its network each month. In the 4 months prior to October, China Mobile had added 5 million iPhone users as well. 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 January next year and that it starts by selling the subsidized version to an additional 1.5 million users every month, it could sell around 20 million additional iPhones in 2013. 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 2019, 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 2019 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. (see China Mobile Needs To Step Up As 3G Growth Slows) 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.