A deal with the world's largest mobile carrier, expected as early as
this week, nets Apple 759 million potential new customers that could
generate $3 billion in 2014 revenue, or nearly one-quarter of
Apple's projected revenue growth in its current fiscal year.
But after the initial haul, Apple will find itself in a familiar,
expensive battle with its main smartphone rival, South Korea's
Samsung Electronics Co Ltd, to win over customers, one wallet at a
And China Mobile will likely have to wait at least a year for its
payout as it spends billions of dollars to build a 4G network so
customers can make full use of their iPhones.
"The easiest way to grow iPhone sales was always distribution. This
was the pot at the end of the rainbow and now that we're there, it's
going to be an old-fashioned slog it out over customers," said Ben
Thompson, a Taipei-based writer on the technology industry at
China is Apple's second-largest market after the United States. Net
sales in China for the fiscal year ended September 2013 rose 13
percent to $25.4 billion, accounting for about 15 percent of Apple's
$170.9 billion in total net sales.
But its performance has been mixed. Where once there were lines
around the block for the newest iPhone, now Apple faces intense
competition from Samsung plus a host of local players such as Xiaomi
making cheaper smartphones.
China Mobile, which says it already has 45 million iPhone users,
could gain 17 million new activations and the deal should generate
at least $3 billion in revenue for Apple in 2014, according to
Analysts expect Apple's revenue to increase by $13.2 billion in its
fiscal year ending September 2014, according to Thomson Reuters
Apple declined to comment on its negotiations with China Mobile.
China Mobile spokeswoman Rainie Lei said talks were ongoing and
declined to elaborate.
AFTER THE GOLD RUSH
The last of the big-name carrier signings marks a shift in the
smartphone battle: once availability is no longer an issue,
marketing becomes the deciding factor.
Samsung has the spending edge.
The South Korean titan is expected to spend around $14 billion on
advertising and marketing this year. Samsung spends a bigger chunk
of its annual revenue on advertising and promotion than any of the
world's top 20 companies by sales — 5.4 percent, according to
Thomson Reuters data. Apple spends just 0.6 percent.
"Apple is definitely going to have to increase marketing spend,"
said Bryan Wang, a Beijing-based analyst with Forrester Research.
"Apple is going to gain revenues from China through the upcoming
China Mobile agreement. But its next question will be how to further
compete with competitors after the first year."
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Another problem for Apple is consumer habits in China, where
smartphone buyers tend to prefer cheaper handsets. More than 88
percent of people buying smartphone handsets in the third quarter
spent less than $500, according to data from Canalys.
The latest iPhone 5S costs $868 in China while the 5C fetches $737,
according to Apple's China website.
To be sure, even winning over a tiny percentage of China Mobile's
759 million subscribers would be a boon for Apple.
"The absolute number of people who are rich and can afford an iPhone
is quite large. It's a big deal," said stratechery.com's Thompson.
For China Mobile, the payout will have to wait as it pumps billions
of dollars into its 4G network roll-out and iPhone subsidies eat
into profit margins.
It will take at least one year before an iPhone deal is profitable
for the carrier, according to Delta Partners, a global telecoms,
media and technology advisory and investment firm based in Dubai.
Moody's Investors Service expects China Mobile's capital spending as
a percentage of revenue will be about 30 percent in 2014, due to 4G
spending. That works out to about 196 billion yuan ($32.28 billion),
based on Thomson Reuters data on revenue forecasts from 29 analysts.
China Mobile's existing iPhone users can only use the company's
slower 2G wireless speeds because its proprietary 3G TD-SCDMA
standard is not compatible with iPhones.
The company hopes the one-two punch of high-speed 4G mobile Internet
and Apple iPhones will bring back customers who abandoned the
carrier for China Unicom Hong Kong Ltd and China Telecom Corp, both
of which already offer the iPhone. China Mobile also hopes to get
current subscribers to upgrade to premium product and service.
One wild card is how the deal will be structured. In the United
States, Apple's home ground, wireless carriers subsidize the iPhone
in return for two-year contracts. These subsidies help make the
iPhone affordable to a wider U.S. customer base.
Analysts estimate operators pay about $400 subsidy for each iPhone
they sell, compared with about $250 to $300 for other smartphones.
While carriers take an initial margin hit, they typically recover
the subsidy cost over the two-year contract because iPhone buyers
typically tack on pricy data plans.
(Reporting by Paul Carsten in Beijing, Poornima Gupta in
San Francisco, Jane Lanhee Lee in Shanghai and Miyoung Kim in Seoul;
editing by Emily Kaiser)
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