In a market that buys more smartphones than the U.S. has people, 100,000 phones is just a small drop in the bucket. It's also the number of pre-orders China Mobile (NYSE: CHL) took for Apple's (AAPL 2.22%) latest iPhones in its first two days of availability, according to Wedge Partners. The largest wireless carrier in the world took fewer early pre-orders than its smaller competitors, China Unicom and China Telecom -- 120,000 and 150,000, respectively.
Perhaps the China Mobile deal isn't as major as people thought. I'm not really worried about it, though.
What might keep pre-orders down?
For one, the iPhone 5s and 5c are now two-months old. Anyone who really wanted a new iPhone has likely already gotten it by switching carriers or buying it on the gray market.
The same note from Wedge Partners points out that sales through other channels -- China Unicom and China Telecom -- have dropped 35% since China Mobile announced its deal. While some of that drop may coincide with the end of the Christmas shopping season, it's likely many are waiting for the iPhone on China Mobile. That's good for China Mobile, but if overall sales aren't meaningfully bumped by the carrier, then Apple is just standing still.
Moreover, China Mobile isn't offering a more enticing subsidy than its competitors. China Telecom was able to move more iPhones than China Unicom in September -- despite its significantly smaller subscriber base -- because it offered a more aggressive subsidy. China Mobile's subsidy isn't any better than China Telecom's.
Why I'm not worried
There are reportedly 30 million-42 million iPhone users on China Mobile's network already. All of these iPhones are relegated to 2G speeds because they're incompatible with China Mobile's 3G and 4G networks. It's reasonable to assume that a lot of these iPhone owners are in the most wealthy and densely populated areas of the country -- the cities where China Mobile's 4G rollout will begin.
It won't be long before many of these iPhone owners have access to 4G speeds, but in order to utilize those speeds, they'll need to upgrade their phones. I expect the 4G rollout and the deal with China Mobile to accelerate the upgrade cycle of the typical Chinese iPhone owner. That's not something that can be identified in only two days of pre-orders, but rather something that will take a bit of time as the infrastructure is built out.
The biggest reason iPhone sales should continue growing in China
Everyone is anticipating the number of iPhones China Mobile will sell, but as a largely qualitative investor, I'm not sure it's the right question to ask. China Mobile will certainly sell more iPhones than it did last year -- i.e., more than 0 -- and estimates for China Mobile's 2014 iPhone sales range from 17 million to nearly 40 million. Of course, those aren't all incremental sales for Apple. A lot of China Mobile's sales will come from the gray market and iPhones otherwise bought off-contract.
Apple has a lot of room for growth in China, however, and the China Mobile deal doesn't hurt. Consider that high-end phones still comprise a small portion of China's smartphone market. These products are desirable, but not affordable to most Chinese consumers. Also consider that China's economy is growing at a steady 7.5% rate, while the population remains fairly stagnant, implying higher average income.
As more people are able to afford high-end phones, Apple will surely benefit. This is the long-term thesis for Apple in China and part of why Apple didn't release a low-end phone for the market. Its deal with China Mobile, and earlier deals with China Unicom and China Telecom, have helped iPhone sales, but nothing will help more than the steady growth of the Chinese economy.
