As China begins to move to LTE networks, one of the key stumbling blocks for Apple and China Mobile coming together on an iPhone deal has been a combined business and technical decision on Apple's part that it wasn't necessarily going to be a profitable move for Apple with either the iPhone 5 or 4S. The company would have had to redesign the phones in significant ways in order for them to work on the network technology that is used by China Mobile.
China Mobile is both the single largest mobile wireless carrier on planet Earth, with an enormous pool of subscribers and the only one to utilize TD-SCDMA technology. It is a protocol that, for whatever reason, China Mobile developed and uses (it is the only one of the big three Chinese wireless services that does). It is also technology that is not supported by any version of the iPhone. For Apple, redesigning the iPhone to work with TD-SCDMA was hardly a desirable way to move forward with China Mobile as the costs would have been prohibitive and the profit results (and associated margins) likely murky, if not downright ugly.
Of course, with Apple on the sidelines Samsung and other players were able to build up a base of Android support in China, not only on the low end - where most of the sales take place, but on the high end as well. This has made Apple look - superficially - to be on its heels and stumbling backwards in China and with China Mobile. All the while, however, Apple and China Mobile have been in ongoing conversations that include Apple CEO Tim Cook spending time in China and communicating directly with his China Mobile counterparts.
In the meantime, China is specifically looking to move its wireless networks to LTE, and China Mobile is moving forward here, as well. China as a country will use TD-LTE, which is different from the FDD-LTE protocols used almost everywhere else. But this is all good news for both Apple and China Mobile and now Apple appears ready to stake its China Mobile claim. Why?
Because the new iPhones - both the next flagship iPhone and the anticipated lower end iPhone 5C (or whatever Apple ends up calling it) will come with LTE chips from Qualcomm that are able to handle both the core FDD-LTE networks in use in most countries as well as the TD-LTE networks that will be used by China Mobile and the rest of the Chinese wireless players. Apple is now in a position where it no longer needs to worry about designing two completely different and incompatible sets of the same devices. One iPhone - all markets covered including the massive China Mobile market.
Because Apple doesn’t have to go to the significant expense of offering a "China-only" iPhone, it also means that China Mobile itself will incur significantly less costs to bring the iPhone to its subscribers. The benefits that accrue to both Apple and China Mobile here mean that China Mobile will be able to sell both iPhone models at prices that its subscribers are able to handle.
The iPhone is Still the King of Cachet in China
Make absolutely no mistake - the iPhone will still be the most exclusive and priciest device that Chinese subscribers will be able to get their hands on. This will be true for both the flagship iPhone sold to premium subscribers as well as for the lower end of the subscriber market that will look to pick up the 5C. As we've long noted in our Apple analyses, the 5C will be the low end for Apple but it will still be priced as the luxury model in the low end camp. From a psychological perspective this actually makes the 5C hugely desirable (not only in China but we anticipate this will be the case globally).
image via shutterstock
Why buy a cheap and disposable-feeling low end Android device when you can show off a real iPhone? Anyone who thinks that the Chinese mobile market will not be willing to cough up the additional dollars in exchange for finally gaining Apple cachet is simply deluding themselves. China Mobile has a massive collection of subscribers but it also has a massive collection of subscribers within the total base that hungers to own an iPhone.
The timing for Apple to enter the China Mobile market is perfect. As Samsung faces a slowing down of high end sales, Apple will ramp up in China with both the flagship iPhone and the luxury device for the low end market. This will drive huge numbers of new iPhone subscribers and will add huge new numbers to the iOS ecosystem. China Mobile, of course, will reap its own significant new wireless data revenue. All of this in and of itself should be enough to give Apple a happy feeling about the rest of 2013 and all of 2014. But it will merely be the icing on the cake.
As we continue to note, we expect Apple to deliver real innovation in just under a month. We anticipate huge numbers of upgrades, especially from the 4S to the new flagship. The 4S meanwhile will be handed off to family members that have had to live with cheap Android devices to date and the 5C will bring things up on the low end. All of this will significantly increase the number of iOS users and specifically we note that this means iOS 7.
Along with that innovation a China Mobile deal - assuming it comes to pass, and we believe it will -rounds out what Apple has so far not been able to effectively execute on. The vast China Mobile subscriber base is evergreen territory and that dynamic will deliver significant new revenue and profits.
Apple's post-holiday season Q1 2014 earnings call is going to be a thing of beauty for investors. Android can certainly keep its market share, but rest assured that it will be Apple that regains its innovation mojo and that will continue to own the majority of mobile profits.
TechZone360 Senior Editor
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