After months of speculation, Apple (NASDAQ:AAPL) finally announced that it has entered into a multi-year deal to offer the iPhone on China Mobile’s (NYSE:CHL) network.  Both the iPhone 5S and 5C will be available for purchase through China Mobile’s as well as Apple’s retail stores in China, starting January 17. China Mobile subscribers also have the option of pre-ordering the iPhone from December 25.
The announcement comes on the back of China Mobile’s official launch of its new 4G service last week, which will be available in 16 Chinese cities by the end of the year. Although 4G coverage will be limited in the beginning, new iPhone users on China Mobile will be able to access its 3G TD-SCDMA service, which has a much wider coverage than 4G currently. In fact, this provides an incentive for existing iPhone users on China Mobile to upgrade, since the older iPhones did not support the carrier’s home-grown 3G network and instead had to be used only on the slower 2G network.
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Huge Untapped Potential
China Mobile is a big untapped market for Apple. The carrier is not only the largest in China but also globally with 760 million wireless subscribers. For perspective, Verizon and AT&T, the two largest wireless carrier in the U.S., combine to account for only around 200 million subscribers. Currently, Apple has subsidy arrangements with China Unicom and China Telecom, which together account for only about 35% of China’s wireless subscriber base. Gaining access to China Mobile’s huge subscriber base will go a long way in helping Apple ward off growing competition from Android manufacturers in emerging markets.
Moreover, when it comes to 3G, China Mobile is an open playing field for handset manufacturers, as incompatibility issues have so far left the carrier’s 3G network largely inaccessible to many of the more popular smartphones available worldwide. While rivals China Unicom and China Telecom have converted more than 40% and 50% of their subscriber base to 3G currently, China Mobile’s 3G penetration is still at less than 25%. With the smartphone market in developed countries becoming increasingly saturated, China Mobile will give Apple greater reach in an emerging market that has already leapfrogged the U.S. as the largest smartphone market in the world, and yet has a lot of steam left due to its low 3G penetration.
However, the iPhone has not beencompletely inaccessible to China Mobile’s subscribers so far. Many customers have purchased iPhones either in the grey-market or unsubsidized from Apple’s retail stores for use on China Mobile’s network to avoid transitioning from the carrier’s vast and more reliable 2G coverage. To overcome 3G incompatibilities, China Mobile has installed Wi-Fi hotspots at many strategic locations to incentivize iPhone purchases. This has helped it add a good number of iPhone users every month. China Mobile had around 10 million iPhone users in October 2011, and in the next four months, it added another 5 million, implying an addition of almost 1.25 million iPhone users to its network each month. For the four months prior to October 2011, China Mobile had added the same number of iPhone users on average. Although we don’t have data for the subsequent months, we can conservatively assume the rate of adoption of unsubsidized iPhones on China Mobile’s network to have remained fairly constant in the past year. This could mean that there are about 40 million iPhone users on China Mobile’s network currently.
$45 Billion Opportunity
Many of these early adopters will now have a reason to upgrade since the iPhone is now compatible with China Mobile’s high-speed 3G network. What also makes China Mobile lucrative from Apple’s point of view is its relatively more affluent subscriber base. Despite lagging in 3G subscriber mix, China Mobile has a mobile ARPU that exceeds the other two carriers’ by $3, or about 45%. Given Apple’s premium price point and the general lack of upfront subsidies in China, we expect the iPhone to be more successful on China Mobile than it has been on the other two carriers so far. Therefore, it will be interesting to see if Apple offers some sort of a concession either in subsidies or any other form to mitigate China Mobile’s subsidy concerns.
Taking into account the historical take rate of unsubsidized iPhones on China Mobile and the likely scenario of the cheaper versions of the iPhone being more popular than the high end in China, we believe a China Mobile deal could add about $45 billion to Apple’s value (see Imminent China Mobile Deal Could Add $45 Billion To Apple’s Value). Our assumptions are contingent on China Mobile actually leading the 3G/4G race in the same way as it has dominated 2G. However, if China Mobile is unable to leverage its affluent subscriber base and the huge market share lead in 2G and turn it into a 3G/4G advantage, that scenario may not play out. 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 & Apple Bring iPhone to China Mobile’s 4G & 3G Networks on January 17, 2014, Apple Press Release, December 22nd, 2013 [↩]