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Has Apple Already Missed the Boat With China Mobile?

By Evan Niu, CFA - Apr 24, 2013 at 7:00PM

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The longer that it takes for Apple to ink official deals with carriers, the more opportunity that rival platforms have to swoop in and establish an installed base. That's how the U.S. market has played out thus far. Will the Chinese market be different?

For Apple (AAPL -2.46%), the elephant in the room has always been China Mobile (CHL). This has been a prominent storyline that investors have been closely watching for years, waiting for the day that the iPhone maker inks an official partnership with the largest wireless carrier in the world.

With over 726 million subscribers at the end of March, of which 114 million are 3G customers, China Mobile remains a significant iPhone catalyst that's always on the horizon. However, there's one big challenge that Apple will face, even after it inevitably launches on China Mobile's unique network: Has Apple already missed the boat with China Mobile?

Not-so-clear sailing
If investors look at how iPhone sales have fared historically in the U.S., there's evidence that suggests that timing does matter. The longer that it takes for a carrier to launch the iPhone, the less of a hold Apple is able to maintain on total smartphone sales. The implication is that absent the iPhone, competing platforms have more time to establish an installed user base, which makes it more challenging for the iPhone to gain traction.

Consider the iPhone's composition of total smartphone sales among the top three domestic carriers: AT&T (T -0.10%), Verizon (VZ 0.43%), and Sprint (S).

Carrier

Launched iPhone

iPhone % of Smartphones (MRQ)

AT&T

June 2007

80%

Verizon

February 2011

56%

Sprint

October 2011

30%

Sources: SEC filings and conference calls. MRQ = most recent quarter.

That being said, the iPhone is still able to gain share within a carrier's activations (the iPhone was just 55% of AT&T smartphone activations in Q4 2010), but it's easier when trying to gain a foothold with first-time buyers as opposed to users entrenched in a rival platform. The 30% figure at Sprint last quarter is evidence of that.

The iPhone is available on both of the smaller Chinese carriers, China Unicom and China Telecom. China Unicom got the iPhone way back in October 2009, with China Telecom coming onboard in March 2012, but neither carrier regularly discloses specific smartphone data. There's also a very active gray market for iPhones in China, which would render carrier-provided statistics less meaningful anyway. Still, the lack of an iPhone on China Mobile thus far may have given rival platforms an opening to swoop in an establish a fort.

The Chinese smartphone market and U.S. smartphone market are very different, and what's playing out stateside may not translate to the Middle Kingdom. Tim Cook noted that China does have an "unusually large number of potential first-time smartphone buyers," and the Chinese market is so enormous (over 1.1 billion mobile subscribers) that there should still be plenty of fish in the sea.

The sooner Apple hooks up with China Mobile, the better shot it has of capturing first-time buyers.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$137.35 (-2.46%) $-3.47
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$49.10 (0.43%) $0.21
China Mobile Limited Stock Quote
China Mobile Limited
CHL
Sprint Corporation Stock Quote
Sprint Corporation
S
AT&T Inc. Stock Quote
AT&T Inc.
T
$20.21 (-0.10%) $0.02
China Unicom (Hong Kong) Limited Stock Quote
China Unicom (Hong Kong) Limited
CHU
China Telecom Corporation Limited Stock Quote
China Telecom Corporation Limited
CHA

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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