Apple’s iPhone Gets Cheaper in China

Apple's (NASDAQ: AAPL  ) iconic iPhone is set to debut on telecom behemoth China Mobile (NYSE: CHL  ) in just 10 days.

The introduction of Apple's iPhone on China Mobile's 3G and 4G networks has been widely expected to generate its fair share of ripple effects throughout the broader Chinese telecom space as smaller competitors like China Telecom (NYSE: CHA  ) and China Unicom (NYSE: CHU  ) adjust to this new competitive threat.

But from the looks of it, that adjustment might be already under way.

Source: Apple

China Telecom plays its hand
China Mobile has yet to unveil exactly how it plans on pricing the iPhone, so it's still unclear just how much the iconic product will cost compared to the pricing schemes at China Telecom and China Unicom. And although China Mobile could throw a curveball by pricing the iPhone more aggressively than expected, it's widely believed the pricing plans and subsidies among China's three key telecom players will remain comparable.

But in a reaction that could signal a looming price war, China Telecom recently increased the subsidies it provides for the iPhone. According to promotional material in Beijing, China Telecom lowered the price it charges for Apple's iPhone by just over 15%, from 5,288 yuan to 4,488 yuan.

This could be a land grab for subscribers on China Telecom's part.

The third largest of China's major telecom companies, China Telecom is coming off an impressive run where profits have grown at double-digit rates in each its last three quarters. But going forward, the outlook isn't nearly as rosy for China Mobile, especially with increasingly strong China Unicom and China Mobile both looming large.

Shifting sands
Without question, China Mobile having access to the iPhone levels the playing field significantly. China Unicom and China Telecom had used the Apple product as a way of differentiating themselves -- and creating a boon for subscriber and profit growth.

But China Mobile adding Apple's iPhone is only one piece of the broader story of the current sea change under way in the Chinese telecom market. The other critical element investors need to understand is the rollout of 4G networks among the big three carriers as well.

According to estimates, investing in a fully functional 4G network that provides an adequate degree of coverage will run around $16.4 billion at the low end for each of China's three telecom giants. As the largest of the three, by far, China Mobile and its $75 billion in cash and short-term investments can easily afford the investment without missing a beat. China Unicom is far smaller and has fewer financial resources. But thankfully for it, China Unicom's 3G network is actually easily upgradable to the popular FDD-LTE standard, making its 4G network rollout relatively affordable and painless. 

Winning while it still can
Unfortunately, China Telecom has neither the easy standards upgrade of China Unicom or the massive financial resources of China Mobile. The prospect of switching to 4G will be hard and expensive for the smallest of China's three telecoms. And it's precisely for this reason why China Mobile could be using the iPhone to acquire as many subscribers today while its hand remains strong on a relative basis.

The sad truth is that China Telecom is facing a challenging one-two combination of its largest rival becoming stronger with the introduction of Apple's iPhone and the huge future expense of its own 4G investments.

So while its recent move to cut the pricing of Apple's iPhone might have seemed strange or abrupt to many, it likely was the smartest move China Telecom could have made.

Let's just hope it works.

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