Mr. Cook Goes to China (Mobile)

Apple (AAPL -0.57%) CEO Tim Cook has been making the rounds in China again. As far as what he's up to in the Middle Kingdom, well, it's not too hard to imagine what's on his priority list. One particular details of his visit actually boosted Apple shares in pre-market trading this morning, which were up nearly $15, or 2.8%, before the open.

A large price to pay
Cook visited China Mobile's (CHL) headquarters and sat down with the carrier's chairman, Xi Guohua. All we know is that the two discussed "matters of cooperation," according to an emailed statement from a company spokesman to Reuters. The fact that Cook is meeting with China Mobile execs gave investors some optimism that Apple is closing in on a deal to make the largest carrier in the world an official iPhone partner.

This comes just a month after China Mobile CEO Li Yue said, "Besides the technical issues, the business model and benefit sharing still need further discussion." Inevitably, this must tie back to discussions over the pricey subsidies that Apple demands from carriers, and China Mobile doesn't want to give the iPhone maker access to its monstrous subscriber base of 707.3 million so easily.

China Mobile estimated its subsidy costs for 2012 around $4.1 billion last year. For some context on how iPhone subsidies could affect China Mobile, consider Apple's biggest domestic carrier partner AT&T (T 1.30%). Ma Bell just said the fourth quarter saw the "best-ever quarterly sales of Android and Apple smartphones." That means the company activated at least 20.3 million iPhones in 2012. At an estimated $425 a pop, that's $8.6 billion.

That means AT&T likely paid over twice as much in subsidies than China Mobile, and that's before you consider the (lower) subsidies it paid on the other 6.4 million smartphones it activated in 2012. China Mobile's total subscriber base is about seven times as large, but its 3G penetration is much lower -- just 12%. In absolute terms, China Mobile has 82.4 million 3G subscribers, and AT&T's postpaid smartphone installed base was 44.5 million at the end of September.

China Mobile has recently shown more willingness to subsidize other devices. Nokia's (NOK 3.60%) Lumia 920T, which is a variant tailored specifically for the carrier's unique TD-SCDMA network, is getting subsidized -- free on contract. The big difference is that Nokia's subsidies are far less than Apple's. Nokia's average selling price for smart devices, which are predominantly Lumias, was $240 in the fourth quarter.

Help me help you
Still, China Mobile has plenty of incentives to play ball with Apple, and could even be cleverly using its Nokia partnership as leverage with the iPhone maker to negotiate lower subsidies. Its 3G penetration is significantly lower than rivals China Unicom (CHU) and China Telecom (CHA), and its share of the 3G-subscriber market has been steadily declining, as both competitors carry the iPhone.

Sources: China Mobile, China Unicom, and China Telecom.

That's a market share loss of 3.5% over the course of a year. If you don't think that sounds like much, keep in mind that total 3G subscribers grew 88% over that same time to 221.6 million. That's a lucrative segment of the market that contributes to higher average revenue per user, or ARPU, that China Mobile is losing traction in, partially due to its lack of the iPhone.

China Mobile's overall ARPU was relatively flat in 2012 at 67 yuan ($10.77). In comparison, ARPU among 3G users at China Unicom was 89.1 yuan ($14.32) for the same quarter, or 33% higher.

Sooner or later, China Mobile's going to have to sign on the dotted line.