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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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iPhonAsia comment: Two key takeaways from today’s “iPhone in China” news (or more accurately “rumors”): 

Victor Koo, CEO Youku

Victor Koo, Youku

1) China Unicom has apparently agreed to preload iTunes on an “official” iPhone through China Unicom.  Will this include Apple’s App Store as well?  We hope so. China Unicom too (like China Mobile) has big plans for their own VAS platform and to make this concession is significant! iPhonAsia is predicting (wild ass guess) that an official iPhone in China will come preloaded with several “popular in China” services (e.g. Youku).

iphone-china-unicom-112) China Unicom has agreed to a pre-purchase of iPhones for their own inventory as part of a formal deal. Hey, a million iPhones here and a million there, and pretty soon were looking at a nice contribution to Apple’s (AAPL) bottom line revenues.

Sidebar: The news snippet below is from JLM Pacific Epoch.  After following the iPhone in China story closely for about 18 months, you begin to notice trends in news services’ reports.  Certain news services seem to tap into “source info” (e.g. iDeals in China has sources in the handset case industry and other news services receive tips from telecom insiders) … Some tips are bogus and others are right on the mark. Who’s hot of late? Without a doubt it is JLM Pacific Epoch followed closely by Interfax and the reporting of Cindy GengEveryone else has been picking up the JLM Pacific Epoch and Interfax posts and running with them … usually a day or week late. For example, much hoo ha was made over Ovum Consulting Group’s (Sherrie Huang’s) report on a likely China Unicom/Apple accord. Ovum’s February report was old news for regular iPhonAsia readers and ample source info appeared to come from Cindy Geng’s Jan 16 Interfax post. iPhonAsia was also out with the story on Jan. 16 thanks to eagle eyes on Interfax. Cindy Geng was kind enough to respond to iPhonAsia comments/questions.

Sidebar 2: For more on the rumored (forthcoming) Apple and China Unicom “finalize the deal” meeting in Cupertino see > HERE

picture-115via JLM Pacific Epoch China Unicom (NYSE:CHU, 762.HK, 600050.SH) plans to release the WCDMA network in selected areas on May 1 and cover 248 cities by the end of the year, reports Sohu quoting company Chairman Chang Xiaobing. Previous reports said WCDMA would launch on May 17 and cover 282 cities before the end of the year. 

An unnamed source said Unicom plans to give Apple (Nasdaq:APPL) certain rewards after securing the iPhone, including purchasing a fixed amount of the phones and pre-installing the Apple iTunes store, reports Beijing Business Today. Rumors in mid-February said Unicom began testing the iPhone in Henan and Hebei provinces two weeks earlier.

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