Windows Phone Overtakes iPhone in China

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According to WPCentral, Microsoft's Windows Phone (NASDAQ: MSFT) has just overtaken Apple's iPhone (NASDAQ: AAPL) in China's burgeoning smartphone market.

In only 8 weeks, Windows Phone has captured 7% of the market, compared with Apple's 6% share, a response Tim Cook has described as “off the charts.” Apple introduced the iPhone 4s into the Asian market in January. Despite the initial fanfare, Apple's position in mainland China continues to deteriorate. 

According to iResearch, China has over 1 billion mobile subscribers, 72.1 million of which own smartphones, a 103% increases Y-O-Y.

Based on the data released by Gartner, iResearch concluded the quarterly changes of market shares taken by various smart phone manufacturers in the domestic market in 2011. Nokia smart phones sold to dealers kept falling each quarter, but Nokia still ranked first in the market. Samsung and Apple ranked second and third while Huawei and ZTE, two local brands, took the fourth and fifth place.

Michel van der Bel, COO of Greater China Region at Microsoft, said that Microsoft appreciated the challenges inherent in the Chinese market, and that the company has deployed a team of 2,500 in its R&D with a sole focus on the Asian market. Android-based phones currently dominate in China by platform, with a whopping 69% of the market.

China is the world's largest market, and the state-owned China Mobile (NYSE: CHL) is the world's largest mobile phone operator, with over 655 million customers. Despite the fact that Apple market share is eroding, Taiwan's Digitimes expects China to account for 20 percent of global Apple iPhone shipments in 2012. 

The reason for Apple's decline in the PRC is China Mobile's older network: 91% of China Mobile's subscriber base still uses GSM (2G), and the telecom giant has been resistant to upgrade. The few 3G customers that China Mobile has use the TD-SCDMA air interface developed by Chinese Academy of Telecommunications Technology (CATT). Neither standard is compatible with the iPhone. 

Why is early positioning so important? Two words: "Brand loyalty."

The Asian smart phone market is still in its formative years. Every 1 in 11 mobile subscribers in China currently has a smart phone. That could be a big problem for Apple, should Chinese subscribers exhibit the same fanatical brand loyalty as subscribers in India, where Nokia continues to be the most trusted brand.

Bottom Line

Microsoft is bringing its A-game to the fastest growing mobile market in the world. Investors who have shrugged off Microsoft as yesterday's news and dead money may want to take a closer look at Windows 8 roll-out and ask themselves if Ballmer and Co. will really go so "gently into that good night." China Mobile is already slated to carry the Nokia Lumia 920T, a move which will likely revitalize the Finnish mobile handset manufacturer's declining market share in the country. Meanwhile, Samsung continues to claw Chinese subscribers away from Apple. If Apple doesn't move quickly to stop the bleeding, America's richest company may find its most profitable product frozen out of the world's fastest growing mobile market. 

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