The prospect of an imminent partnership between Apple (NASDAQ:AAPL) and the world's largest wireless network, China Mobile (NYSE:CHL), kept Apple investors on their toes for much of the second half of 2013. When China Mobile finally announced on Dec. 22 that it would begin selling the iPhone, Apple shares leapt higher.
Since that initial rush of enthusiasm, many people have had second thoughts. China Mobile began taking iPhone pre-orders on Christmas Day, ahead of a Jan. 17 availability date. According to analysts at Wedge Partners, early presale totals were uninspiring. Perhaps because of this news story, Apple stock has lost its momentum in the past week or so.
However, investors should wait to draw conclusions about Apple's likely success at China Mobile. First, it's possible the Wedge Partners analysts underestimated pre-order numbers. Second, presale totals may not accurately gauge total demand. Lastly, demand is likely to grow over time because of the expansion of China Mobile's 4G service and iPhone pricing changes.
The China Mobile opportunity
It's not surprising the China Mobile news has had an outsize effect on Apple's stock performance. With more than 750 million subscribers, China Mobile is the world's largest wireless carrier. As a result, an Apple-China Mobile partnership has the potential to drive millions, or possibly even tens of millions of incremental annual iPhone sales.
In the near term, there's also a significant upgrade opportunity. There are tens of millions of older iPhones running on China Mobile's network -- nobody knows exactly how many -- but those devices are not compatible with China Mobile's 3G and 4G data services. Many of those users will probably want to upgrade to an iPhone 5s or iPhone 5c in order to take full advantage of China Mobile's network.
In this context, it might seem surprising that only 100,000 people pre-ordered an iPhone through China Mobile on the first day of availability. The much-smaller China Telecom and China Unicom each received more pre-orders when they received the new iPhones in September.
However, it's first important to remember that this 100,000 figure is just one analyst team's estimate, and it shouldn't be treated as a fact. More important, pre-order numbers may not be representative of China Mobile's eventual iPhone sales.
This is because the iPhone 5s is no longer supply-constrained, as was the case for the first few months following the global launch in September. By the end of November, Foxconn was reportedly building the iPhone 5s at a rate of 500,000 per day (or 45 million per quarter). That's substantially higher than the likely post-holiday season demand from the rest of the world.
As a result, there's no reason to believe China Mobile will have a shortage of iPhones when they become available on Jan. 17. Since the main reason for pre-ordering a product is to guarantee availability, the lack of supply constraints could be reducing pre-order volume even if demand is quite strong.
Don't forget the big picture
Furthermore, Apple's China Mobile opportunity is not a one-time affair. While the short-term upgrade opportunity is significant, the iPhone's arrival at China Mobile will pay dividends for Apple well beyond this quarter.
First, as China Mobile is rolling out its faster 4G network, the iPhone 5s and iPhone 5c are being promoted as two of the initial phones to be compatible with that network. Being associated with high-speed 4G data could help Apple boost its long-term market share in China.
On the flip side, 4G service is only available in a few cities today, so some potential iPhone buyers may wait until China Mobile begins offering 4G service in their area. However, China Mobile currently has ambitious plans to expand 4G coverage to 340 cities by the end of 2014. That could drive a lot of incremental demand over the course of the year.
Additionally, iPhone demand at China Mobile is likely to grow after the next iPhone launch, which will presumably happen this summer or fall. Many tech observers expect the iPhone 6 to have a larger screen than previous iPhone models, which could be a strong selling point in China. Apple also traditionally cuts the price of its older iPhone models when releasing a new device, which could put the iPhone 5c at a much more affordable mid-range price point.
Wait and see
It's possible that iPhone pre-order demand has been modest at China Mobile so far. However, investors should not despair. While there is some potential for a short-term spike in iPhone sales due to the China Mobile launch, Apple's long-term opportunity at China Mobile is even more significant.
There are several reasons low pre-order estimates do not necessarily imply weak sales when the iPhone becomes available at China Mobile later this month. If Apple investors are patient, they are likely to be rewarded with substantial share appreciation this year and beyond as Apple starts to exploit this big opportunity.