Fortune Apple 2.0 has a post today summarizing a research note issued by Shaw Wu, a senior telecom analyst. Wu covers Apple (AAPL) for Kaufman Brothers and is known for his sources in Asia. In his note, Wu suggests that while China Unicom is now the frontrunner for an iPhone deal, China Mobile remains a strong and “interested” contender. The key issues to be resolved, according to Wu, can be categorized under economics, control and compatibility. More via Apple 2.0 > Analyst: China Mobile still an iPhone contender
Shaw Wu’s comments are very interesting … particularly given China Mobile’s recent “not so subtle” shot across Apple’s bow via a leak to Intexfax TMT – China Mobile calls on operators to hold firm against Apple’s revenue-sharing demands. I posted a response to Interfax’s article on June 26 > iPhonAsia responds to China Mobile’s spin.
If there is still hope for a near-term (2009/10) iPhone deal with China Mobile, then it would most likely be for an EDGE 2G version of iPhone. Apple COO Tim Cook has hinted in the past that Apple would address markets where prepaid plans* are popular (e.g. “BRIC” nations – Brazil, Russia, India & China):
“When you look at some of the international markets, you find that the markets are very different … you might find one where there is no post pay business, or minimal (post pay) … That might need a different business model. You might find one (market) where being exclusive might not be in our best interest. And so I am not announcing what we will and won’t do. I am announcing that we are going to intelligently think about each one (each market) and then decide what is best for the company (Apple).”
Adding to rumors over Apple’s aim at prepaid customers,* there was ample buzz earlier this year surrounding Apple’s development of a low-price iPhone (Nano size?). Here is another quote from Shaw Wu (February ‘09 research brief ) … we’re “hearing” Apple is in “fairly advanced development” on three new iPhone models, but doubtful they will all be commercialized. In Feb ’09 Shaw Wu postulated that one of new “under lock-n-key” iPhone models, has a smaller 2.8 inch screen versus the current model 3.5-inch screen. Wu noted that this so called iPhone Nano was “less likely to see the light of day in the near term as it appears that software, and thus feature sets, will be the key differentiator.”
Here is my take on the “outstanding issues” (economics, control, compatibility) that Shaw Wu suggested may need to be resolved in final iPhone in China negotiations:
Economics – Revenue sharing and handset subsidies are likely the issues on the table. China Mobile plans to take a full 50% of the revenues from their own “soon to launch” Mobile Market app store. Many developers are grumbling after hearing this news. And when it comes to any form of handset subsidy … China Mobile has stated on numerous occasions that they are drawing a line against such payments to manufacturers. Ah hypocrisy … Turns out that China Mobile is (by necessity) now subsidizing all TD-SCDMA 3G phones.
NOTE: Barring the slim chance that China Mobile will heavily subsidize, and agree to pre-purchase in large quantity, a special iPhone production for China Mobile, Apple won’t risk building a TD-SCDMA iPhone.
Control – Both China Mobile and China Unicom are building their own proprietary Android-based handsets, mobile operating systems and app stores. The difference is that China Unicom will follow a path of “coop-a-tition” (cooperation + competition) with Apple. My guess is that a key to this coop-a-tition is allowing Apple to control a major portion of the WVAS chain, including the delivery iPhone apps though Apple’s China App Store (albeit China App Store revenue sharing will likely be different than the “rest of the world” … China Unicom will take a healthy share).
China Mobile, on the other hand, wants to control the entire wireless value-added services (WVAS) chain. Much more > here. Should Apple/China Mobile talks get serious again, China Mobile would likely push Apple to forego delivery of apps through Apple’s App Store (where Apple takes 30% with 70% to developers) in favor of China Mobile’s own Mobile Market (where China Mobile takes a 50% share and Apple 0%). Mobile Market is rumored to be launching later this summer. A beta Mobile Market site is now running.
In my mind, WVAS control is the biggest obstacle to an iPhone deal with China Mobile (Apple too wants to control WVAS). However, 488 million subscribers is a tempting carrot to waive in front of Apple. If Apple were to build a low cost (low priced) 2G only model for China Mobile (appx 290 million of China Mobile’s subscribers are prepaid), this would not directly threaten the value proposition of the iPhone 3GS (for higher end users), which appears to be on track as a “3G exclusive” for China Unicom.
Compatibility – iPhone 3GS will be ready for launch on China Unicom’s WCDMA 3G network just as soon as China’s Ministry of Industry and Information Technology (MIIT) issues Apple a Network Access License (NAL). iPhone 3G (1 to 1.5 million now unofficially in PRC) and iPhone 3GS can also run very well on China Mobile’s EDGE 2G network, but not on China Mobile’s TD-SCDMA 3G network.
Given China Mobile’s rapid move (quietly but very evidently) to TD-LTE 4G, it is my opinion that Apple will not develop a model that supports the nascent and connection-challenged TD-SCDMA 3G network. It’s my opinion that China Mobile pushed Apple hard last year to build a TD iPhone 3G. It is also my guess that Apple demonstrated good faith in negotiations with China Mobile and may have, at one point, undertaken considerable design/build efforts on an iPhone that would support China’s proprietary TD-SCDMA. However, TD network usability issues have been stark and persistent. Moreover, China Mobile’s own decision to fast-track development of LD-LTE 4G has been interpreted by many (Apple too) as a short lifespan for TD-SCDMA.
No matter the future of TD-SCDMA, China Mobile will maintain their EDGE 2G network, which has broad coverage and a clear signal throughout major urban zones in China. In my view EDGE 2G could be the bridge between Apple and China Mobile. There are hundreds of millions of low-salaried prepaid wireless consumers in China who aspire to iPhone. Many have in fact already purchased cheap Shanzhai (iClone) knock-offs. But Shanzhai iPhones are not reliable and quickly become landfill. A low-priced “real” Apple iPhone running EDGE 2G only, might sell by the tens of millions.
* Prepaid customers are not on contract with a carrier and are sometimes referred to as “pay as you go” subscribers. Approximately 290 million of China Mobile’s 488 million subscribers are “prepaid.”