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China Mobile calls on operators to hold firm against Apple’s revenue-sharing demands

by Cindy Geng

Beijing. June 26. INTERFAX-CHINA – A China Mobile employee has called for a united front between the country’s three telecom operators in order to challenge Apple’s precondition on any iPhone deal with operators that it retain a high proportion of the revenues from the sale of iPhone applications.

Huang Yan, manager of the planning section of China Mobile’s business support department, said that Apple’s insistence on taking a large share of revenues from the sale of iPhone applications is a “threat to the value chain of China’s telecom industry.”

“Apple’s revenue sharing plan relegates telecom operators to mere custodians of the network, and denies them adequate revenue to cover the huge amount of bandwidth that iPhone users require,” Huang said.

Yan added that China Mobile ended negotiations with Apple due to Apple’s demands for a high proportion of revenues from application sales.

“Although the three operators in China are competitors, we should be unanimous when our business model is being challenged,” Huang said.

China Unicom is currently in talks with Apple over offering iPhone services in China. However, sources at China Unicom have told Interfax that the revenue-sharing plan being offered by Apple is below the operator’s bottom line.

A Wi-Fi-disabled version of the iPhone is in the process of getting a network access license from the Ministry of Industry and Information Technology (MIIT).

iPhonAsia’s response to Interfax Article:

Hi Cindy,

I love the opening quote in your article:

cmhk_logo_2“A China Mobile employee has called for a united front between the country’s three telecom operators in order to challenge Apple’s precondition on any iPhone deal with operators that it retain a high proportion of the revenues from the sale of iPhone applications.”

Picture 3This sounds like a jilted “love interest” (China Mobile) who wants to throw a cold pale of water on a new blossoming romance between Apple and China Unicom.

Not only does it sound petty, but in many parts of the world, when companies conspire to fix pricing, that’s a violation of anti-trust laws. While China Mobile’s Huang Yan does not appear to be demanding fixed pricing, it’s somewhat perplexing that he is calling on all three major telecom operators to come together to challenge Apple. Huh?! Last time I checked, Apple has not yet sold one “official” iPhone in the People’s Republic of China.

Why would Apple, with 0% “official” market share, be perceived as such a threat to China Mobile?  It’s really a rhetorical question … I know the answer. This campaign against Apple’s revenue model is really just a subterfuge. This is a power struggle between carriers and all smartphone manufacturers who might dare challenge the monopoly of the carriers. While Nokia and other original equipment manufacturers (OEMs) sell tens of millions handsets in China, they cannot yet match Apple’s platform or value proposition.

Right now Apple has the most compelling products (iPhone and iPodTouch) and a wildly popular value-added services platform (iTunes, App Store, OS 3.0 and regular “free” software upgrades for iPhone and nominal fee for iPod Touch). If Apple’s wireless value added services win the populatiy contest, then carriers might be perceived as “dumb pipes.” Hence, I see today’s quotes from Huang Yan (China Mobile) has a tactic strait from the Sun Tzu’s “Art of War.” Instead of going to battle against all competing tribes (Nokia, RIM, Palm, HTC, etc.), pick out the most serious treat to dominance, and crush them, thereby instilling fear in all others who would dare to pose a challenge.

iphone-china-unicom-111But is Apple really posing a threat to carriers’ value chain? I would say no! Emphatically no! The reality is that carriers are not precluded from imitating Apple’s game, as long as they respect Apple’s intellectual property. And imitation is exactly what they are doing – China Mobile with their OPhones and OPhone OS (Android-based) and Mobile Market … and China Unicom with their UPhone (also Android-based) and UniPlus OS and their own app store. The difference is that China Unicom is going to follow the path of “coop-a-tition” (cooperation + competition) while China Mobile is apparently doing what they can to torpedo Apple’s budding relationship with China Unicom.

I am actually somewhat amused to see China’s dominant carrier (China Mobile) in such tizzy that they would send out a manager (Huang Yan) to attempt create controversy; “it’s us against Apple.” Perhaps this is more a reflection of China Mobile’s anxiousness over China Unicom’s WCDMA 3G? There are now well over 1,000,000 iPhones running on China Mobile’s EDGE 2G network. Many of these will be ripe targets for upgrade to WCDMA 3G on China Unicom’s network.

In the second to last sentence in today’s report, you noted that; “China Unicom is currently in talks with Apple over offering iPhone services in China. However, sources at China Unicom have told Interfax that the revenue-sharing plan being offered by Apple is below the operator’s bottom line.”

Interesting information. I suspect this may be somewhat of a face saving quote from China Unicom. They do not want to be perceived in the industry as having given up too much in their negotiations with Apple.

I am also curious as this quote appears to be in conflict with statements attributed to China Unicom in your April 7 post – China Unicom to get majority of revenues from iPhone App Store – source

“Apple Inc. has agreed to grant China Unicom the majority share of revenues from its App Store as part of ongoing discussions between the two parties regarding the introduction of the iPhone to China, a China Unicom source told Interfax on April 7.”

So now I wonder which China Unicom source is/was correct? The source quoted on April 7, who revealed that an agreement on App Store revenue sharing was complete? Or the source today, who now suggests the revenue-sharing plan being offered by Apple is “below the operator’s bottom-line?”

If your April 7 report is accurate, Apple has already agreed to give a “majority share” of App Store revenues to China Unicom. Where will this majority share come from? There are three hungry people at the table – Apple, China Unicom and Developers – and the pie can only be sliced so many ways. Apple may giving up some of its 30% share and/or developers may need to take a less than 70% share. If your latest (today’s) report is true, then China Unicom may be angling for an even greater slice of the pie. I suspect this “pie allocation” has already been settled per your original April 7 report.  I further suspect that China Mobile is just kicking up dust today in the hopes that they can embarrass Apple and China Unicom.

As far as the “fairness” of Apple’s app revenues share split … I would point out that there are very different cost-to-value propositions between Apple’s App Store and China Mobile’s new Mobile Market app store.

A bit of background …

China Mobile’s app store (Mobile Market) remains under development and will likely launch with only a fraction of the apps in Apple’s China App Store. How enthusiastic is China’s developer community to build for Mobile Market? In May, China Mobile announced their decision to share only 50% of Mobile Market revenue with developers while retaining a full 50% share for themselves. Many developers have quietly grumbled that this split is unfair. By comparison Apple’s model gives a full 70% share to developers (albeit this may be different in China). In addition to a smaller slice of the revenue for developers, Mobile Market developers will also need to work harder if they hope to make decent money on their apps. They will need to code apps for each mobile operating system (China Mobile’s OPhone [Android-based], Win-Mobile, Symbian, etc.). It is also my guess that China Mobile will need to subsidize some of the app development on Mobile Market. Hence their actual revenue share may wind up being less than the advertised 50%.

While it has not been discussed publically, China Unicom will almost certainly utilize Apple’s China App Store (versus their own “under development” app store) for delivery of apps and games to iPhone owners. Thousands of iPhone apps are already “good to go” on Apple’s China App Store. This is relevant has there are far fewer costs, if any, to be borne by China Unicom. Developers too will find the iPhone 3.0 SDK a pleasure to work with, and they can take advantage of “in app” purchases, subscriptions and integration with hardware devices to boost their revenues.

Apple’s App Store in China is a proven quantity. iPod Touch owners in China are already downloading apps and there is no complex build or ramp-up stage in order to launch for iPhone owners in China. The point being that it is hard to find justification for China Unicom’s demand for a greater than 50% share of Apple’s App Store revenues. I am certain that there are other rationales for China Unicom seeking out more revenue (e.g. to offset subsidy payment [if any] to Apple). China Unicom may also be looking to squeeze more reveune as they will need to price the iPhone competitively in PRC in order to effectively shut down grey market smuggling of iPhones into China. Competitive pricing may be even more important if WiFi is disabled on the official iPhone. It should be noted, that notwithstanding the grey market origin, Apple makes money on each “real” iPhone sold in China.

In the final analysis, I suspect China Unicom’s share of App Store revenues (likely finalized back in April) will turn out to generate more in bottom line revenue than the 50% share that China Mobile will take from Mobile Market.

Thanks again Cindy for your good reporting on Apple and iPhone in China negotiations.

~ Dan Butterfield

Editor, iPhonAsiahttp://iphonasia.com

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Video Interview: Omar Hamoui AdMob on Bloomberg

AdMob is the world’s largest mobile advertising platform. AdMob serves 6.2 billion mobile ads per month. For more info on monetizing apps, see iPhonAsia presentation – Cashing in on iPhone and the Mobile Applications Revolution delivered at iPhone Developers Meet-up on May 28 in Santa Clara > PPt Download

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china_mobile_logoDevelopers who build apps for Mobile Market,*(China Mobile’s answer to Apple’s App Store) are in for a surprise. China Mobile will reportedly seek a 50% cut of all Mobile Market sales.

ophonesmlTelecomAsia is quoting a Shanghai Mobile (subsidiary of China Mobile) source; “China Mobile wants at least 50 percent of the revenues, and the rest goes to the developer.” By contrast, Apple’s App Store and Google’s Android Market take a 30% share of revenues and payout the 70% balance to app publishers.

A smaller slice (50% vs. 70%) of the revenue pie is one issue … another problem for Mobile Market developers is the need to recode apps for each mobile operating system (OPhone’s OMS** [Android-based], Win-Mobile, Symbian, etc.).

Excerpt from TelecomAsiaBaoding-based Zhu Lianxing, who leads a team named “139.ME” noted that the biggest challenge for China Mobile would be to provide a consistent user experience across different phone models and OSes; “If we develop an app for Apple, it runs on both the iPhone and the iPod touch. Now we have to develop one app for each OS.”

Read more > HERE

* China Mobile will allow developers to post apps for all handset OS except the iPhone. It will be accessible from both GSM and TD-SCDMA phones.

images** China Mobile’s OPhones (due to launch summer 2009) will all run China Mobile’s proprietary open mobile system (OMS) and will support China Mobile’s “proprietary” wireless value-added services:

See video interview with China Mobile CEO Wang Jianzhou discussing China Mobile’s new MOS. Wang Jianzhou also mentions iPhone > HERE

More on China Mobile’s new app engine > HERE



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MeetupI was honored to be a presenter at the May 28 iPhone for Business Meet-up event delivered at TEN’s (The Enterprise Network) HQ in Santa Clara, CA. Thank you to David Cao, CEO of Extend Logic for inviting iPhonAsia. I shared the podium with Michael Chang, CEO of Greystripe and Adam Blum, CEO of RHomobile.

My presentation was entitled – Cashing in on iPhone and the Mobile Applications Revolution. Thank you to Bo Wang, CEO iBokan for allowing me to share his iPhone app case study. The iPhonAsia PowerPoint presentation can be downloaded > HERE

This was my second opportunity to attend a Meet-up event sponsored by Extend Logic. As you might imagine, iPhone developers are a very interactive and “wicked smart” (to borrow a Tim Cook quip) group. They asked many excellent questions and had plenty of insights to share. We learned about several interesting business models and offered a few tidbits and case studies on ways/means developers can monetize their apps.

There are many takeaways from these iPhone developer events, but one general theme that holds true … we are only at the very beginning of an amazing mobile content revolution! It’s also very evident who will lead this revolution – Apple and the iPhone, iPod Touch platform.

Related posts on iPhonAsia >

Here is the first slide from last night’s iPhonAsia presentation –

Picture 2

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Discussing iPhone gaming applications in high demand, with Trip Hawkins, Digital Chocolate CEO.

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china-iphone-300x2081crystal-liu-pic-0014BusinessWeek 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.

China handset market Oct 2008

China handset market Oct 2008

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).

iphone-china-unicom-11One 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”

China TelecommunicationsBusinessWeek 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.

one-billion-appsWill 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.

200902041829020540776As 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.

Okay, so it's about 200K students**

Okay, so it's downloads, not students**

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. 

Picture 1Picture 2

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

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* 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

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**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.”

 

 

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The Wall Street Journal’s Andy Jordan has posted a video on Tech Diary chronicling how a few enterprising developers are raking in cash by building apps that appeal to everybody … well, make that the lowest common denominator. 

Before you lose hope that pandering vs. adding real value is the only way to make money on application development, have a view of Om Malik’s video interview with Omar Hamoui, founder and chief executive of AdMob. Watch > HERE

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