Behind the Hype of Apple's China Mobile Launch

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Dow component and economic bellwether General Electric this morning reported fourth-quarter earnings per share that were in line with Wall Street expectations, so it is perhaps fitting that stocks should open roughly unchanged, with the S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) down 0.18% and up 0.04%, respectively, at 10:15 a.m. EST.

Today is the day that Apple (NASDAQ: AAPL  ) enthusiasts in China -- and many Apple shareholders everywhere -- have been anticipating for some time, as the iPhone went on sale on China Mobile's network. China Mobile is the world's largest mobile carrier, with 763 million customers at the end of last November.

However, China Mobile is hardly pushing the iPhone at this stage, selling the iPhone 5S and 5C at unsubsidized prices of 5,288 yuan (roughly $870) and 4,488 yuan (roughly $740), respectively -- the same prices available from Apple stores or the Apple website in China.

The nation's No. 2 and No. 3 carriers, China Telecom and China Unicom, already offer the iPhone on their networks and have recently cut the price of their contracts in anticipation of China Mobile's iPhone launch. China Telecom, for example, has cut the rate on its 24-month contract for the 16GB iPhone 5S by up to 24%. China Mobile is banking on the 4G network it is building to leapfrog its rivals' technology and attract high-end users, but for Apple those are "cannibalization" sales.

On Wednesday, China Mobile reported 1.3 million advance orders for iPhones on its website, but checks made by Reuters showed there were multiple registrations with fake ID numbers. Little wonder, then, that one equity research analyst told The New York Times that advance orders would only translate into one-third as many firm orders.

Finally, keep in mind that there exists a substantial gray market for iPhones smuggled into mainland China from Hong Kong. China Mobile itself says there are already 45 million iPhone users on its network -- more than 60% of the iPhones in use in China, by one estimate!

Apple CEO Tim Cook was in Beijing on Friday to mark the occasion at the opening of a China Mobile retail store, underscoring the importance of the China Mobile agreement to his company. However, Apple is taking the long-term view here (as well it should): It took several years to negotiate this deal with China Mobile and it will take several more before the payoff really becomes apparent. Sure, we may witness a short-term bump in sales in the first quarter, but, for all the hype surrounding this deal, it's a long-term bet, not a short-term catalyst for a significant rerating in the shares.

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Comments from our Foolish Readers

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  • Report this Comment On January 17, 2014, at 10:28 AM, Mathman6577 wrote:

    Most of the hype is actually coming from the Apple haters and stock market bears trying to minimize everything the company does. Even if the company didn't do a deal the bashers would write something different.

  • Report this Comment On January 17, 2014, at 10:31 AM, dwilh51183 wrote:

    PREORDERS AAPL SOLD 1.65 MILLION IPHONES IN 3 WEEKS SO DO THE MATH.AAPL EARNINGS WILL GO MUCH HIGHER AS SOON AS AAPL STARTS LICENSING THEIR IOS SOFTWARE TO OTHER MOBILE PHONE MAKES LIKE NOKIA AND RIMM,AND CHINESE COMPANIES.PLUS 6' IPHONE IS IN THE MAKING

  • Report this Comment On January 17, 2014, at 10:38 AM, aeosfool wrote:

    Reuters has access to China Mobiles database? Wow, could they become the Target of China.

    Seriously, between this and The New York Times reporting on China Mobile iPhone demand from Tokyo, there is so serious wired reporting going on!

  • Report this Comment On January 17, 2014, at 10:39 AM, gsagi wrote:

    Totally clueless. The so called subsidies in China are implemented in way different from the rest of the world. If an author is lazy enough to read some crap on the WSJ an repeats it it signifies only the laziness of the author's bottom line.

    A contact free phone is one thing, a phone bought in a 24-month contract is another. China Mobile requires a "deposit" that amortized over the course of the contract. You are welcome little sleeper!

  • Report this Comment On January 17, 2014, at 10:49 AM, Mathman6577 wrote:

    I agree @aeosfool and @gsagl.

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