The iPhone Goes to China … This Time, Legally

If imitation is the sincerest form of flattery, then Apple (Nasdaq: AAPL  ) has to feel pretty flattered by what's gone on in China over the last couple of years. Knockoff versions of the iPhone, replete with large touchscreens and user interfaces that (at first glance, anyway) look much like the real thing, have gained a pretty big following in the world's biggest cell phone market. So have genuine versions of the product, to an extent, with one Chinese research firm estimating that more than 1.5 million iPhones have been smuggled into the country, even though no local carrier officially supported them. So, when the iPhone finally appears on the shelves of China Unicom's (NYSE: CHU  ) retail outlets in the fourth quarter, thanks to an agreement that Apple just reached with the carrier, it'll be going to a place where it's had a decent advance reception.

Financially speaking, is the China Unicom deal an important one for Apple? Definitely. Considering that China has more than 680 million cell phone users, and that many of them are already familiar with the product, it's no small matter. That said, for the following reasons, the deal might not be quite as lucrative for Apple as investors are hoping:

  • As of the end of last year, China Unicom only accounted for 133 million of China's mobile phone subscribers. Rival China Mobile (NYSE: CHL  ) accounted for more than 450 million. In addition, Unicom has a reputation for being a low-end carrier, with an average revenue per user (ARPU) that's 43% lower than China Mobile's. Unicom does have a strong national reach, but it's clearly not the ideal partner for Apple in this case.
  • China, on the whole, is still a relatively poor market. The country's per capita GDP, while having grown a ton over the last 30 years, stood at less than $3,300 at the end of 2008 on an official exchange rate basis. Unicom's ARPU, meanwhile, was a mere $6.04/month in Q1 2009 -- a small fraction of the $27/month it hopes to charge for its cheapest 3G iPhone plan. The iPhone could still do brisk business in some of the wealthier parts of China, but unless Unicom's willing to get very aggressive in subsidizing prices, it's also likely that many fans of the product will consider it out of their price range, and prefer to stick with the knockoffs.
  • Unicom's iPhones won't support Wi-Fi, thanks to government regulations. This could diminish the iPhone's popularity a little -- especially with users looking to use Wi-Fi to sidestep paying data tariffs.
  • Unicom probably drove a hard bargain with Apple. I'm sure that Apple would've preferred to do a deal with China Mobile, and barring that, have a deal in place with Unicom by last summer -- at the same time that they struck deals with many other international carriers. That they weren't able to do either tells me that negotiations were tough. Certainly, if Apple's wholesale price to Unicom is anything like the $300 reported by Chinese news sources (though later denied by Unicom), it'll be a far cry from the $560 average iPhone selling price estimated by a Gabelli & Co. analyst for the last quarter.

When all is said and done, the financial impact of the Unicom deal could be closer to that of Apple's deal with Telefonica S.A.'s (NYSE: TEF  ) O2 division in the UK, or France Telecom's (NYSE: FTE  ) Orange division in France, than to its earth-shaking deal with AT&T (NYSE: T  ) . Not a bad day at the office for the world's most famous fruit company … just not the stuff of breathless headlines, either.

Eric Jhonsa hopes that Forrest Gump held onto his Apple investment, but he has no position in any of the companies mentioned. Apple is a Motley Fool Stock Advisor pick. France Telecom is a Motley Fool Income Investor selection. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 30, 2009, at 11:58 AM, sanju168 wrote:

    There seems to be great euphoria over Apple going to China and the huge potential there... just a word of caution..India a country of similar size and demographics and an equally technology savvy country should have offered similar potential....but I-phone flopped miserably in India...with just 20,000 I-phone sold till about one or two months ago...this is verifiable fact...

    So please think again before going euphoric about China potential

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