Why Apple Is Losing Profits in China

Say goodbye to Apple's  (NASDAQ: AAPL  ) software profits in China.

Recently, Chinese hacker group KuaiYong launched a pirated iOS App Store, letting anyone and everyone in China download Apple apps for free. KuaiYong also implemented geolocation techniques to make sure only those in China can access the website -- thus preventing any interference from the Cupertino company.

While you may think the innovative giant may have a few tricks up its sleeves, don't count on it. For a while now, American tech giants have realized the odds are against them. Back in 2011, Microsoft (NASDAQ: MSFT  ) CEO Steve Ballmer noted that Chinese revenue would only be 5% of its U.S. sales. He said that with good reason: A study conducted around that time found that the illegal market for software goods was three times that of the legal software market.

In the video below, Fool contributor Kevin Chen further outlines why China spells doom for Apple's software sales. Still, he thinks that there's reason to be bullish about Apple's future, thanks to prospects of a China Mobile  (NYSE: CHL  )  deal. To learn more about Apple's prospects, watch the video below.

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  • Report this Comment On April 23, 2013, at 3:00 PM, speechisntfree wrote:

    who would expect anything less from such a country..... with citizens who have no moral compass to guide them.....

    the shame of it is..... I would expect the same could happen right here in the United States done by our own citizens.....

    they say that the 80's was the "I love me" generation..... but buddy..... the 80's can't hold a candle to the current crop of the "new millenniums".

  • Report this Comment On April 23, 2013, at 3:29 PM, jonkai3 wrote:

    uh, the problem with your argument, is those Chinese need to Buy iPhone's for that nice hack, and Apple give's it's software away for free... it makes it's money on Hardware, any bells and whistles going off there?

    as far as the app store, those pirated apps have on average 30% malware... pretty soon, $1 apps don't look so bad, even for the Chinese who are rich enough to buy an iPhone in the first place.

  • Report this Comment On April 23, 2013, at 4:09 PM, makelvin wrote:

    What the author fail to understand is that even though Apple consider themselves as a software company, they primarily make their money through their hardware. It is doubtful that the pirated iOS app store will really hurt Apple's bottom line all that much.

    Apple themselves have been consistently reducing their software prices. Just look at Mac OSX; Apple's usual price was around $100. Recently, they dropped their prices to $30 and then more recently, they dropped again to $20. On top of that, unlike MS Windows, their software rarely requires any complicated copy protection scheme at all. You don't really even need to type in a registration number to run their software. It is as thought they are not really all that concern about how that software gets used or distributed as long as they are running on one of the hardware unit.

    In fact, they are much more concern when someone would be using their software on non-Apple hardware. Case in point, a very small company was selling Mac compatible computers online using legally purchased Mac OSX operating system. Apple was very quick to shut down their operation in a hurry.

    Remember, one of the reason Apple's iPod was so successful in the past was that Apple did not try to make a lot of money in iTunes. For years, they were operating iTunes slightly above breaking even. This makes it very difficult for other companies to compete with iTunes alone and still want to make a decent profit or compete with Apple's iPod hardware alone without the very cost effective iTunes ecosystem. This allows Apple to complete dominated the music player market to this date and continues to profit enormously through their iPod hardware sales year after year.

    One can even say that Apple's business model is the reverse of the razor and razor blades business model. They like to give away and sell their razor blades and sell their razors at a premium price. And whenever possible, they like others to be making these low cost blades for them.

    For Microsoft, this is a completely different story. Until very recently, Microsoft was virtual considered to be a pure software company. Even now, they are still consider primarily a software company by and large since majority of the revenue are derived through their software sales. So China rampant piracy will obviously hurt their bottom line.

    Given Apple's business model, one can even argue that the pirated iOS appstore might even help Apple's hardware sales and thereby the overall revenue in China.

    The people that these piracy will be hurting are the third party software developers. Of course Apple still need to control the piracy to a degree; otherwise if the developers are not making money through their ecosystem, they will stop developing it. Fortunately, large percentage of Apple's customers are affluent users and have no problems paying for their software. Despite Android's global market share dominance, majority of the app revenue still actually comes from Apple's iOS. Since as the author has mentioned, the China's pirate iOS appstore will only limit to others within China, it will have very little impact to iOS app revenue elsewhere.

    Another group that will be hurt by these software piracy is actually China itself. If China does not try to control their software piracy issues, their own software development industry will continue to have very limited global presence since it will not be profitable for any software business within the country to thrive. There are many Chinese in the States here working and developing software in many large and small companies alike. The Chinese are very capable in software development if given the opportunity. Yet, China's software industry is almost laughable and irrelevant at the global scale. If China is really serious about wanting to make their software industry a potent force like their hardware manufacturing, they themselves need to rein in on the software piracy issue even without other countries having to force their hands.

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