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Could Apple, Inc. Get a Boost From China Mobile Phone Subsidies?

By Daniel Sparks – Mar 23, 2014 at 1:00PM

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China Mobile will substantially boost subsidies in 2014, and Apple will be a major beneficiary.

This will be the first quarter that Apple (AAPL -0.14%) benefits from iPhone sales at China Mobile (CHL), the world's largest wireless carrier. While the opportunity for Apple that resulted from a January arrangement with the carrier was already significant, the arrangement just got even sweeter.

China Mobile's new catalyst
China Mobile will boost subsidies further in 2014, said the company's Chief Financial Officer Xue Taohai after it reported an uncommon decline in annual earnings. As the same stiff competition from 2013 that caused the annual decline in China Mobile's earnings persists, the company is responding aggressively. China Mobile will spend 26% more on subsidies in 2014. "[I]t aims to keep smartphone contract prices low in the face of competition from rivals," said Reuters.

The timing couldn't be better for Apple. The company's iPhone rollout on the carriers network is just beginning. Apple CFO Peter Oppenheimer said during its first-quarter earnings call that the China Mobile's 4G network expansion should be a boon for iPhone sales throughout the year. At the time of the call, the 4G expansion had only made it to 16 cities and that China Mobile plans to cover 340 cities by year-end, Oppenheimer said.

iPhone 5s. Apple's premium-priced smartphones rely heavily on carrier subsidies to drive sales, helping consumers keep their cost down.

Why subsidies matter so much
As a premium-priced smartphone, Apple benefits immensely from subsidies. In the U.S., where substantial subsidies are prevalent, Apple is far and away the most prominently used smartphone brand. Apple's share of the installed base of smartphones in the U.S. in January 2014 was 41.6%, according to comScore. Samsung came in second at 26.7%. Apple's smartphone market share in the U.S., for the most part, has been steadily increasing since mid-2010.

To further highlight the importance of subsidies for Apple, investors can just take a look at the company's robust average selling price compared to the market. Apple's ASP for its iPhones is running at about $650. Comparatively, the average ASP for the entire smartphone market is about half that. With premium prices like this, subsidies are all the more important.

Even more, smartphones costing more than $500 in China only make up 27% of active smartphone devices, according to app analytics firm Umeng; this small share highlights how important the role of price plays in smartphone purchasing decisions in the country. Umeng notes that 80% of smartphones sold in the $500-plus category in China are iPhones.

A big opportunity
So, higher subsidies from China Mobile is excellent news for Apple investors. Not only is China the world's largest smartphone market, but it is still growing rapidly. Active smartphones in China nearly doubled between the first quarter of 2013 and the fourth quarter, according to Umeng. A 26% boost to subsidies in a market like this adds a lot of upside potential for Apple.

And if Apple investors should get excited about any specific carrier in China boosting subsidies, it would be China Mobile. With a wireless subscriber base of 776 million subscribers, higher subsidies at the world's largest carrier combined with an aggressive 4G rollout could make a meaningful difference for Apple in 2014.

Daniel Sparks owns shares of Apple. The Motley Fool recommends and owns shares of Apple. It also owns shares of China Mobile. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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