For all the hype, Apple Inc's long-awaited iPhone agreement with China
Mobile Ltd may deliver little more than a fleeting revenue jolt for the
A deal with the world's largest mobile carrier, expected
as early as this week, nets Apple 759 million potential new customers
that could generate $3 billion in 2014 revenue, or nearly one-quarter of
Apple's projected revenue growth in its current fiscal year.
(Also see: China Mobile says no iPhone deal with Apple yet)
after the initial haul, Apple will find itself in a familiar, expensive
battle with its main smartphone rival, South Korea's Samsung Electronics
Co Ltd, to win over customers, one wallet at a time.
Mobile will likely have to wait at least a year for its payout as it
spends billions of dollars to build a 4G network so customers can make
full use of their iPhones.
"The easiest way to grow iPhone sales
was always distribution. This was the pot at the end of the rainbow and
now that we're there, it's going to be an old-fashioned slog it out over
customers," said Ben Thompson, a Taipei-based writer on the technology
industry at stratechery.com.
China is Apple's second-largest
market after the United States. Net sales in China for the fiscal year
ended September 2013 rose 13 percent to $25.4 billion, accounting for
about 15 percent of Apple's $170.9 billion in total net sales.
its performance has been mixed. Where once there were lines around the
block for the newest iPhone, now Apple faces intense competition from
Samsung plus a host of local players such as Xiaomi making cheaper
China Mobile, which says it already has 45 million
iPhone users, could gain 17 million new activations and the deal should
generate at least $3 billion in revenue for Apple in 2014, according to
Analysts expect Apple's revenue to increase by
$13.2 billion in its fiscal year ending September 2014, according to
Thomson Reuters I/B/E/S.
Apple declined to comment on its
negotiations with China Mobile. China Mobile spokeswoman Rainie Lei said
talks were ongoing and declined to elaborate.
After the gold rush
last of the big-name carrier signings marks a shift in the smartphone
battle: once availability is no longer an issue, marketing becomes the
Samsung has the spending edge.
Korean titan is expected to spend around $14 billion on advertising and
marketing this year. Samsung spends a bigger chunk of its annual revenue
on advertising and promotion than any of the world's top 20 companies
by sales - 5.4 percent, according to Thomson Reuters data. Apple spends
just 0.6 percent.
"Apple is definitely going to have to increase
marketing spend," said Bryan Wang, a Beijing-based analyst with
"Apple is going to gain revenues from China
through the upcoming China Mobile agreement. But its next question will
be how to further compete with competitors after the first year."
problem for Apple is consumer habits in China, where smartphone buyers
tend to prefer cheaper handsets. More than 88 percent of people buying
smartphone handsets in the third quarter spent less than $500, according
to data from Canalys.
The latest iPhone 5s costs $868 in China while the iPhone 5c fetches $737, according to Apple's China website.
To be sure, even winning over a tiny percentage of China Mobile's 759 million subscribers would be a boon for Apple.
absolute number of people who are rich and can afford an iPhone is
quite large. It's a big deal," said stratechery.com's Thompson.
China Mobile, the payout will have to wait as it pumps billions of
dollars into its 4G network roll-out and iPhone subsidies eat into
It will take at least one year before an iPhone
deal is profitable for the carrier, according to Delta Partners, a
global telecoms, media and technology advisory and investment firm based
Moody's Investors Service expects China Mobile's
capital spending as a percentage of revenue will be about 30 percent in
2014, due to 4G spending. That works out to about 196 billion yuan,
based on Thomson Reuters data on revenue forecasts from 29 analysts.
Mobile's existing iPhone users can only use the company's slower 2G
wireless speeds because its proprietary 3G TD-SCDMA standard is not
compatible with iPhones.
The company hopes the one-two punch of
high-speed 4G mobile Internet and Apple iPhones will bring back
customers who abandoned the carrier for China Unicom Hong Kong Ltd and
China Telecom Corp, both of which already offer the iPhone. China Mobile
also hopes to get current subscribers to upgrade to premium product and
One wild card is how the deal will be structured. In the
United States, Apple's home ground, wireless carriers subsidise the
iPhone in return for two-year contracts. These subsidies help make the
iPhone affordable to a wider U.S. customer base.
operators pay about $400 subsidy for each iPhone they sell, compared
with about $250 to $300 for other smartphones.
While carriers take
an initial margin hit, they typically recover the subsidy cost over the
two-year contract because iPhone buyers typically tack on pricy data
© Thomson Reuters 2013