The Most Important Part of Apple's Deal With China Mobile Is Still Unknown

Apple's (NASDAQ: AAPL  ) long-awaited deal with China Mobile has finally been announced. Starting next month, subscribers to the world's largest carrier will be able to purchase Apple's iPhone. Undoubtedly, this will result in more iPhone sales, but how many more remains to be seen.

Apple's share of the Chinese market has declined notably in recent years, as Samsung (NASDAQOTH: SSNLF  ) and other OEMs that use Google's (NASDAQ: GOOGL  ) Android have risen to dominate the Middle Kingdom. Without heavy subsidization, Apple could find itself remaining a token player in China.

How heavily will China Mobile subsidize the iPhone?
Both the iPhone 5s and 5c will go on sale through China Mobile starting Jan. 17, but exactly how much subscribers will have to pay remains unknown. Last week, Bloomberg reported that China Mobile planned to boost subsidies next year in an effort to drive smartphone adoption.

That would be terrific for Apple, as its expensive iPhones are largely unaffordable without carrier subsidies. China Unicom and China Telecom have both carried Apple's smartphones for some time, but cut their subsidies last year alongside the iPhone 5s' launch.

With the average Chinese family bringing in about $12,000 per year, Apple's iPhone 5s -- which retails for well over $800 in China -- is simply too expensive for most. Perhaps that's why Apple's share of the Chinese smartphone market has dwindled in recent quarters, down to about 6% -- it had been over 10% in 2011.

Samsung and other Android OEMs have gained at Apple's expense
While Apple's share of the Chinese smartphone market has declined, Samsung's has grown, from about 14% last year, to over 21% last quarter. Samsung's willingness to offer smartphones at lower price points likely allowed it capture a larger percentage of the market.

Samsung has also led the markets in phablets (smartphones with screens larger than conventional phones, but smaller than tablets), a category that's becoming increasingly important in China. Back in September, IDC said phablets were now outselling both tablets and PCs combined in Asia (excluding Japan).

China has also produced a number of its own Android OEMs, including Huawei, ZTE and Xiaomi, the later of which recently hired Google's former executive Hugo Barra. Like Samsung, these companies have been willing to produce larger phones at cheaper price points: Xiaomi's Red Rice smartphone sports internals comparable to Apple's iPhone 5c, but costs a fraction of the price -- just $130.

Chinese developer support could become a problem 
Of course, the Red Rice runs a modified version of Google's Android -- if Chinese buyers want iOS, they have no choice but to go with an Apple-made handset. In the US, that's a huge advantage for Apple, as Western developers continue to favor Apple's platform, but in China, that could soon become a liability.

According to research firm Flurry, Chinese developers favor Google's mobile operating system. That's understandable -- with Apple's expensive iPhone holding just a token share of the market, Google's Android powers more than half the Chinese smartphones in existence.

It's worth noting that while Android dominates China, it doesn't do Google much good. Google's app store, Google Play, is virtually a non-factor in China (third party app stores are generally used) and heavily modified versions of Android are common. In short, the Google/Apple narrative Western investors are used to simply doesn't hold up in China.

How much will China Mobile subsidize the iPhone?
Apple's deal with China Mobile has been expected for months, and with the deal finalized, analysts will no doubt factor in millions more Chinese iPhone sales in 2014. But the most important part of the deal -- the iPhone's price -- has yet to be unveiled.  

Apple investors should hope for heavy subsidies. Although Apple continues to sell millions of iPhones in China, its share has slipped as Samsung, and other OEMs using Google's Android, have undercut it on pricing. With Chinese developers throwing their support behind Google's operating system, Apple can't afford to be marginalized in China for too much longer.

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  • Report this Comment On December 23, 2013, at 12:42 PM, gsagi wrote:

    Bubba, it is not a subsidy, it is a LOAN—read more blogs (Daringfireball, Asymco, The Macslope) and avoid vacuous talking heads—like yourself!

    Cheers!

  • Report this Comment On December 23, 2013, at 12:42 PM, gsagi wrote:

    Macalope

  • Report this Comment On December 23, 2013, at 12:57 PM, melegross wrote:

    As of October, Apple has risen to third in the Chinese market, with slightly I've a 15% share! while Samsung has declined to 19%.

    Just the facts reported elsewhere.

  • Report this Comment On December 23, 2013, at 12:58 PM, melegross wrote:

    Oh, I forgot to mention. That's while being on two carriers whose total market share is about 30%.

  • Report this Comment On December 23, 2013, at 1:35 PM, jdmeck wrote:

    Another fool who does not realize that share of market is not important. Only profit really matters.

  • Report this Comment On December 23, 2013, at 2:01 PM, johnestromjr wrote:

    Sam, sorry to say but you're a bit clueless when it comes to Apple. Suffice to say, Samsung has not had much competition from Apple in China until recently and up until now only China Telecom and China Unicom were able to sell the Apple iPhones. With the China Mobile deal will come Apple's chance to win China Mobile's 760 million customers. They'll not get all of them. Probably won't get even half of them but even 10% of that subscriber base [ very doable within 2-3 years] that could mean 76 million iPhone sales. As important,those who buy an iPhone will surely download many apps and many iPhone owners will also buy an iPad.

    I don't think you understand the Chinese when it comes to them wanting the best. And they will sacrifice much more than we to own the best. Whether you or I think the iPhone IS the best is up for debate, but like the Japanese, most Chinese DO think Apple is the best. And will do whatever it takes to own one. That is the kind of image and brand loyalty Apple has built and they are going to keep that image so long as they DO build the best.

  • Report this Comment On December 23, 2013, at 2:03 PM, GaryDMN wrote:

    Why is it that analysts doubt Apple and have blind faith in Google, a one trick pony that funds all their money losing follies in other markets, from ad profits, that are becoming less profitable due to competition from Facebook, Twitter and others. Google has to give away open source software, while losing big money on patent lawsuits, which is a terrible business model.

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