BusinessWeek has just posted a rather pessimistic article on iPhone’s prospects in China. If you’re an iPhone fan take a deep breath, exhale and relax. In iPhonAsia’s opinion, this article – Why China won’t fall for the iPhone – is nothing more than straw man hit piece. To win the debate using the straw man strategy, you simply define your opponent’s case using faulty suppositions. You then easily knock down your opponent’s argument like a flimsy straw scarecrow.
Let’s examine BusinessWeek’s straw stuffing:
- Straw One: “Nokia sold 71 million handsets in Greater China last year”
BusinessWeek highlights these numbers apparently to show how weak Apple’s position is compared to Nokia, the dominant handset manufacturer in China. Thank you Captian Obvious. Nokia has been in China for years and Apple has not yet officially entered China. Although 1.5 million grey market iPhones in China is not a bad testimony to the potential demand.
What BusinessWeek fails to point out is that Nokia’s 1st Quarter 2009 “sales fell 27% from the year-earlier quarter, operating profit plunged 96%, and the average selling price for the company’s portfolio of mobile phones—a closely watched indicator of demand—fell to $86 from $94 at the end of 2008.” Don’t believe me? I just quoted from an April 16, 2009 BusinessWeek article that further notes the current Nokia handset margins average about 9%. Here’s a news bulletin … iPhone Margins* in the US are well north of 50% when you include the carrier subsidy. If you totally eliminate the carrier subsidy (using the 16G model as an example) the margin remains at a stellar 18%.*
- Straw Two: “iPhones are expensive.”
Peppered throughout the BusinessWeek article is the theme that the iPhone is just too expensive and therefore will not capture significant marketshare in China. What BusinessWeek fails to understand is that the iPhone will never be the “low price” leader and has no ambitions to undercut the price of basic cellphones or crippled iClones. Motorola tried the low price strategy and it has nearly driven them out of the China market.
As Mark Sue of RBC Capital put it (January 18, 2007): “Motorola might want to reconsider its strategy of having yesterday’s hit phones becoming tomorrow’s free phones!”
Pssst BusinessWeek … It’s margins that matter. If you fail to pay attention to margins, you’re following the Peggy Bundy School of Economics. The majority of handset manufacturers in China need to sell 10, 20 or even 30 phones to capture the same bottom-line profit as one iPhone sale. To put it simply, iPhone does not need to capture an “elephant size” share in China to be a money-maker for Apple, China Unicom and thousands of app developers.
BusinessWeek goes on to suggest that China Unicom cannot afford to subsidize iPhone in China and they site the price for unlocked iPhones in Hong Kong at $800 per. The implication is that Apple will not be able to offer the new iPhone 3.0 in China at a price much below $800. All we can say is “stay tuned.” The new iPhone for China will retail for less than 5,465 Renminbi ($800 US).
One interesting item is the rumor that China Unicom has successfully negotiated a 50% share of Apple’s China iPhone App Store revenues. The normal split has been 30/70 with the lion share percentage to developers. Under the China Unicom split, it might look something like 15/15/70. It has also been rumored that, in return for a share of the app store revenues, China Unicom will provide a “per unit” subsidy payment (amount unknown) to Apple. In the US it has been surmised that AT&T’s subsidy payment to Apple has been $300 per unit.*
- Straw Three: “TD-SCDMA (China Mobile’s network) handsets are retailing for less than US$250”
BusinessWeek feels that iPhone may have trouble competing with lower priced TD-SCDMA phones that will run on China Mobile’s new 3G network. This is an easy one. TD-SCDMA phones should be priced lower. In this case, the old truism applies “you get what you pay for.” The current crop of TD handsets are not smartphones and really don’t compare to iPhone. The handset competition may get better when (don’t hold your breath) ZTE, LG, Levono, HTC, and Nokia finally introduce their TD smartphones … For now, these “coming soon” phones remain on the drawing board. They will also be dependent on OPhone, China Mobile’s new mobile operating system (MOS). OPhone has received much press but it has yet to launch. Consider also that China Mobile is taking the highly unusual step of providing R&D funding (RMB 600 million – $87.77 million US) to 12 TD-SCDMA phone and chip manufacturers.
Why is this subsidy necessary? iPhonAsia believes the money is being fronted because handset manufacturers are unwilling to risk (spend) their own capital to develop new TD smartphones (with OPhone OS) that must be integrated with China Mobile’s value-added services platform. This process may be more technically challenging and less profitable than China Mobile’s well-paid consultants first promised.
Will third-party developers abandon China Unicom and the Apple iPhone App Store (70% payout to developers) in favor of unknown opportunities via China Mobile’s new app store – a.k.a. Mobile Market? Not likely. Where would you invest your time and money? We have heard virtually nothing of the OPhone SDK and we have yet to hear how China Mobile will share their Mobile Market revenues with developers (Update: China Mobile will share only 50% of Mobile Market revenues with developers – ouch!). And then there’s the question of when Mobile Market launches in China? Thus far China Mobile has only stated by “year end.” It’s a fair bet that Apple and China Unicom will have iPhone apps “officially available” in China before Mobile Market is open for business.
- Straw Four: The App Store is not localized for China
BusinessWeek explains that AppStore has already launched in China for Apple’s iPod Touch, but it is in English and many of the applications are international.
I guess BusinessWeek does not believe that Apple will take steps to further localize the App Store for China. BusinessWeek is simply mistaken. Soon after the iPhone is formally launched in China, look for many new “for China” apps that have been fully localized for the China Market.
- Straw Five: China’s mobile app companies and developer community prefer to develop in Java or Nokia’s symbian.
BusinessWeek also adds “The selection of unauthorized Chinese applications for ‘jailbroken’ phones is better … Most won’t bother to rewrite applications for a niche phone, especially given Apple’s conrol-freakery concerning what applications it permits in its store.”
If you think that Apple might be finicky about the nature and “tastefulness” of apps in its store, then let me introduce you to the official censors in China. They invented the term “control-freakery.” If there’s money to be made, the apps will be modified, if necessary, and submitted to the China App Store.
As for the contention that “China’s developers prefer Java and Symbian and won’t rewrite apps for a niche phone”… BusinessWeek is in for a surprise. iPhonAsia has consulted with many iPhone developers who are hard at work on “for China” apps. iPhonAsia recently had lunch with the CEO of Extend Logic, an IT development company based in Santa Clara and Xi’an China. Extend Logic and their China-based subsidiary Knowledge Surf, have been directly involved in training new iPhone and Android developers in both the US and China. Extend logic is one of many companies training tens of thousands of developers.
The iPhone momentum is growing, and it’s not just for fun and games … Enterprise is rapidly coming aboard the iPhone train. Thousands of corporations are now somewhere along the iPhone app development path. If you check any job board, you will find that iPhone developers are very much in demand.
Want more evidence? The Stanford University iPhone Application Programming CS193P class is now the most popular iTunes U course with over one million (1,000,000) downloads.** How many of those downloads are from developers in China? Who knows? But it is surely in the tens of thousands.
The images below show the most popular iPod Touch apps on the iTunes App Store in China. My guess is that one or two of these apps will be available for the “niche” iPhone.
Third-generation (3G) networks are new to China and so too are app stores and proprietary mobile operating systems. There are many moving parts in China carriers’ battle for smartphone consumers. The fact is that it’s too early to pick the China’s smartphone winners and losers. But I would not count out iPhone … the pathway is littered with the corpses of pundits and paid consultants who bet against Apple’s iPhone.末端
* Regarding iPhone margins … here are iPhonAsia’s unscientific (“back of the napkin”) calculations using iSuppli numbers for cost of goods (COG) … iPhone 3G 8 gig model COG tallies up $174.33 (give or take) + about $50 in royalties = $224.33 in costs. iPhone 3G 16 gig model COG is about $20 more than the 8 gig model or $244.33
Apple is selling the iPhone to carriers for about $500 to $550. The retail price is $199 or $299 (knock off a couple of bucks if sold through BB or WalMart). That makes for healthy margins… 8 gig iPhone Revenue = $499 ($199 + $300 carrier subsidy) COG = $224.33 (materials + royalties) Gross = $274.67 $275/$499 = 55% margin
16 gig iPhone Revenue = $599 ($299 + $300 carrier subsidy) COG = $244.33 (materials + royalties) Gross = $354.67 $355/$599 = 59% margin
**As Apple 2.0 points out …”although the total is more than a million downloads — 1.2 million to be precise — that’s the sum of all the course videos (15 so far). A far smaller number of people, 186,500, downloaded the introductory lecture. More recent lectures, representing the meat of the semester, have a sustained download rate of more than 200,000 per class.”