China Mobile and Apple Need Each Other
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
China Mobile (NYSE: CHL) is the world’s largest cell service provider, with more than 650 million subscribers and a commanding lead in its domestic market. Apple (NASDAQ: AAPL) is the world’s largest company by market cap, a leading smart phone manufacturer, and a true innovative force. Even though both are successful in their own right, they may need each other to continue their rapid growth.
Apple’s plight is highlighted by recent data from Gartner, which shows South Korea-based Samsung leading smartphone share in China with 24.3% of the market while Apple trails in 5th place with just 7.5% of the market. Apple did command 10.4% in the previous quarter but fell further behind, partially due to the impending release of the iPhone 4S. The biggest difference between the two companies is their carriers: Samsung’s phones are carried by all three major Chinese carriers, while Apple is only carried by two. China Telecom (NYSE: CHA) is a recent addition with Apple’s handsets going on sale last week on the network. The addition of China Telecom should help win back share, but a deal with China Mobile would greatly expand their potential market while leveling the playing field with Samsung. China Telecom is the number three carrier, with 129.3 million users as of the end of January, which pales in comparison to China Mobile’s user base.
For China Mobile’s part, the iPhone could help pull customers toward more expensive data services and help increase average revenue per user, or at least help stem its erosion. In its end of the year earnings release, the wireless giant posted a decline in average revenue per user, dropping from 73 yuan per user in 2010 to 71 in 2011. Average revenue per user is a key statistic for wireless carriers and has an enormous effect on a company that currently has a subscriber base more than twice the size of the U.S.’s total population. Adding the iPhone to its lineup would also erase the competitive advantage its presence confers to rivals China Telecom and China Unicom (NYSE: CHU).
China Mobile isn’t in dire straits; in fact the company is doing quite well, posting an 11% increase in net profit for 2011 while adding 65.55 million mobile users for the year. Both net profit and revenue beat analysts’ estimates, with revenue increasing 8.8% for the year to 528 billion yuan from 485.2 billion the year before. Net profit was 125.87 billion yuan, or $19.88 billion, for the year.
There is clearly desire for Apple’s handsets to exist China Mobile’s network; the company already has 15 million iPhone users even though it isn’t an official carrier of the phone. There’s also the fact that the 15 million iPhones on the network aren’t even compatible with its high-speed 3G, meaning they’re using the much slower 2G network or Wi-Fi. Without China Mobile, Apple is missing out on an extraordinarily large portion of the Chinese mobile market; China Mobile’s 650 million subscribers make up 65.81% of China’s 987.6 million cellular subscribers. And while the purchase of unlocked phones clearly has some impact, even that has weakened – Apple has stopped selling iPhones in its own retail stores. The phones are still available online, but the removal from stores will slow sales of unlocked iPhones.
One major reason the iPhone isn’t offered on China Mobile’s network is the fact that it uses its own 3G standard. In May, the company’s Chairman Wang Jianzhou announced at the company’s annual meeting that he didn’t expect Apple to offer an iPhone until the carrier finished its 4G TD-LTE network. This is similar to the situation in the United States where AT&T (NYSE: T) had the exclusive rights to offer the iPhone and even unlocked iPhones were incompatible with Verizon’s (NYSE: VZ) network. As the iPhone became available on Verizon, sales grew at an even greater rate. The recent launch of the iPhone 4S was the first iPhone launch involving all 3 major U.S. carriers and just happened to coincide with Apple’s biggest quarter ever and record iPhone sales.
In the end, both companies are doing well, and neither will collapse without the other, but working together could provide great benefits. China Mobile would gain a phone that has incredible global demand that is already offered by its competitors and Apple would gain access to the single largest wireless subscriber base in the world’s largest country. Smartphone shipments in China are expected to jump 52% to 137 million units, which would make China the world’s largest smartphone market. If the impending iPhone 5 makes its way to China Mobile, I’d expect another record-breaking quarter to follow for Apple.
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