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Posts Tagged ‘Negotiations’

Upfront cash and cashflow from Apple’s rumored iPhone in China deal

Washington Post’s Tameka Kee reports that Apple’s rumored 5 million iPhone sale to China Unicom will generate about $100 per unit in profit for Apple. Kee states that this is less than the estimated $400+ per unit that Apple now gets on its deal with AT&T. My reaction … “Um, yeah … no kidding” … We’re not on a level playing field in China. We need to get a toehold in China, with some 700 million wireless consumers, and then go from there. Besides this deal is far more profitable than the initial margin calculations suggest.

picture-342Let’s do a quick breakdown … iSuppli has a BOM estimate of $178.96 for the iPhone 3GS. The report from CBN states that Apple’s iPhone deal with China Unicom is for 5,000,000 iPhones purchased upfront for $1.46 billion. That’s $292 per unit less the $178.96 = $113. But there are other variables to consider. Apple will almost certainly NOT be providing China Unicom with the standard iPhone 3GS model. The special model for China will likely be the new model A1324 and it will likely cost less to build and distribute. If numerous reports are to be believed, this model will not include WiFi (a $5 to $10 savings per unit). Moreover, it is likely that China Unicom will cover virtually all shipping, marketing and distribution expenses associated with a China iPhone launch. So you can knock off another $18 to $25 per unit in expenses that Apple would normally incur.

Whether Apple will receive ongoing App Store and iTunes revenues under this China deal is a large question mark? Pure conjecture on my part, but I would not be surprised to learn that Apple has assisted China Unicom with the development of a China Unicom branded version of Apple’s App Store and iTunes. A bit more background and flat out guesswork

Li Yizhong - MIIT VM

Li Yizhong - MIIT VM

Apple’s China iPhone negotiations have ostensibly been with potential carrier partners (first China Mobile and later China Unicom), but the watchful parent has always been in the background whispering instructions into the child’s ear. It is my view that China’s Ministry of Industry and Information Technology (MIIT) has had the final say on the iPhone deal terms. And it’s apparent that China’s MIIT has no intention of allowing Apple, or any handset manufacturer for that matter, to capture substantial wireless value added services (WVAS) revenues that China feels belong to its indigenous carriers. Consequently, to get any iPhone deal done in China, Apple may have been required to give up a large portion of revenues from the Apple iPhone platform (iTunes and App Store). picture-2That does not mean “no apps” or music for China iPhone owners. It just means a different platform, one with China Unicom’s brand. This will likely be a cloned version of Apple’s platform designed by Apple for China Unicom. I believe that Apple will be (shhhh … quietly) “cut in” for a certain percentage of WVAS revenues despite all of the posturing in the China tech press that “Apple will forego its revenue sharing model.” Since saving face is very important in China, I expect that Apple will not publicly disclose any assistance they may provide to China Unicom in developing their special iPhone WVAS platform, and nor will they publicly identify (break out) revenues from this WVAS partnership.

As with most Apple ventures, the iPhone deal in China will prove to be handsomely profitable and cash will continue to accrue to Apple’s bottom line … starting with a cool $1.46 billion up front!

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iphonechinaThe following is my reply to Artman’s post (quote below) on the terrific AAPL Sanity message board. Artman is referencing Tim Cook’s careful choice of words when asked when iPhone might be launched in China. Twice now Tim Cook has stated that Apple’s objective is to have iPhone officially in China “within a year.” (i.e. could be tomorrow… or 12 months from now)*******************

Picture 2Atman: << THE QUOTE I remember – Tim Cook: “Within A year” >>*********************

And that’s a wise quote to keep in mind Artman … As Yogi Berra often admonished “nothing is done till it’s done!”(a bit of a paraphrase)
In my last post I listed a few of the issues that could still be on the Apple/China Unicom negotiation table (won’t repeat here).
lebronblockmingWhen I think about the China iPhone negotiations, I think about how much is controlled by the the “powers” looking to protect “greater interests” in China. I’m reminded of my pick-up basketball games down at the local gym. The same guys show up every Saturday … Teams get picked and the competition is fierce. It’s human nature to want your team to win, and you’ll fight like crazy to score big and shut down your opponent. But when the game is over, everyone, no matter the team they were on, is still good friends. Next game, the guy you battled and elbowed may be your own teammate. And when a stranger shows up at the gym and “has game,” you want that guy (Apple) on your team. But no matter how well the stranger can play, he won’t supplant the relationships with the guys you’ve known for years.
In China’s telecom industry, the wireless carriers compete like crazy, but everyone knows each other very well and they are always very mindful that the telecom industry comes first … and if necessary State authorities will remind carriers that China’s telecom industry comes before any one company’s immediate self-interest.
*****************
So you can draft a great “outside player” (Apple) to help you win the game … but if authorities perceive that the industry might suffer or lose face (outside player commands too much attention and boosts pay for players vs team owners), then the game can and will be rigged.
Long way around to my point … which is that China is not making things easy for Apple, an outside player that has “serious game.” China’s ministries want to bring their own carriers’ “game” (value-added services platforms) up to Apple’s level and/or otherwise constrain Apple’s game. No WiFi for you Apple! Only China’s WAPI standard. Want to offer wireless value-added services on your own iTunes/App Store platform?  Might take awhile to approve that.
***************
All that said … there are multiple parties in China who have serious economic interests in a prompt and successful launch of iPhone, including:
  • Apple China
  • China Unicom/vsnes.com
  • Foxconn (Hon Hai Precision)
  • Best Buy China – probable iPhone distributor
  • Wal-Mart China – possible iPhone distributor
Plenty of money will be spent on an iPhone launch … “Net net” iPhone in China will be good for China’s economy

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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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Backstory on iPhone negotiations

iphone-china-unicom-11

As has become more and more evident, the negotiations with China Mobile over a 3G iPhone have come to a standstill. There may still be some hope for a 2G iPhone deal (EDGE iPhone Nano) with China Mobile, but you might have better odds of winning at Three Card Monte than betting on an iPhone deal with China Mobile in 2009. But don’t fret … an official iPhone in China is coming soon! China Unicom and Apple have made considerable progress on a deal. This time there will be no need to fill up cargo containers for a long overseas voyage. China Unicom warehouses are not far from Hon Hai’s city within a city – Foxconn’s Shenzen, China campus. The full story on iPhone negotiations between Apple and China’s carriers can be found > HERE

Gang Li

Gang Li

China Stakes has posted an interesting article on the evolving iPhone negotiations between Apple and both China Mobile and China Unicom. The article contains no major revelations and most of the negotiation trials and tribulations have been well documented here on iPhonAsia. There were, however, several items in this article that might be of interest to regular iPhonAsia readers. For one, the article confirms that Gang Li China Unicom’s Executive Director of Mobile Communications, and Yu Yingtao, head of China Unicom’s handset management center and its procurement subsidiary Vsens.com, were key members of the China Unicom delegation that met with Apple in Cupertino March 8th through the 18th. Much more on these negotiations > HERE

picture-1There have been several rumors in the Chinese financial press about a substantial (forthcoming) iPhone pre-purchase for China Unicom’s inventory. The Vsens.com unit run by Yu Yingtao, is the entity most likely to acquire and warehouse new model iPhones. Keep your eye out for a fleet of trucks pulling into China Unicom distribution centers later this summer … no labels on the boxes, but they will be well guarded!

Wang Jian Zhou

Wang Jianzhou

Another item of note in the China Stakes article was the mention of a China Mobile delegation that reportedly met with Apple in Cupertino in the Summer of 2008. China Stakes reports that this negotiating team was led by members of China Mobile’s Data Department, headed by Gao Nianshu. The article goes on to say that China Mobile CEO, Wang Jianzhou was involved in several video conference calls with Steve Jobs and Apple executives. We can toss out a few guesses how these negotiations ended … China Mobile wanted Apple to:

  • Support TD-SCDMA (build a TD iPhone 3G)
  • Strip out current iPhone services (iTunes, App Store, etc.) in favor of China Mobile’s WVAS

Apple said “no” … more background and analysis > HERE

Probable Apple visit to Beijing in the Spring

Chang Xiaobing

Chang Xiaobing

There is still a chance that Apple executives will meet with Wang Jianzhou when they fly to Beijing this Spring, however any meeting with China Mobile may be simply a courtesy call. Is it really necessary for Apple to go to China? In a word … Yes! This Apple sojourn would reciprocate China Unicom’s visit and be a show of respect for the delegation that visited Cupertino in March. First and foremost on Apple’s Beijing agenda will be conversations with China Unicom Chairman Chang Xiaobing and his team. Secondary agenda items might include a meeting with Lou

Minister of Industry and Information Technology Li Yizhong

Li Yizhong

Qinjian, Vice Minister of China’s Ministry of Industry and Information Technology (MIIT) and perhaps even a meeting with the MIIT Director, Li Yizhong. This would not be just a social call. The MIIT holds the final approval over any handset sold officially in China. There is also an outside chance that China’s MIIT will change their policy and approve WiFi on handsets, as long as the phone meets China’s WAPI encryption standards. The full story on WiFi in China can be found > HERE


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apple_unicom2Update: China Mobile’s CEO spoke to a reporter on Saturday, March 21. According to Wang Jianzhou, China Mobile’s talks with Apple have stalled, albeit “the door remains open.” This is no surprise as Apple is moving forward with China Unicom. Details > HERE (in Mandarin)

iPhonAsia Comment: Here (below) is iPhonAsia’s response to Dr. Cheng Dejie’s March 20 article China Unicom’s Apple deal may leave a sour taste published via Interfax. Read > HERE

iPhonAsia Responds to Dr. Cheng Dejie (Interfax)

Dear Dr. Dejie:

Telecom Analyst Dr. Cheng Dejie

Telecom Analyst Dr. Cheng Dejie

Thank you for your interesting article. Your arguments are supported by facts, and I agree with many of the discussion points you’ve presented. Yet there is a general theme in your article that I do take issue with. That is the idea that China Unicom may regret any agreement they make with Apple that compromises their ability to control wireless value added services (WVAS).

The title of your article “China Unicom’s Apple deal may leave a sour taste” clearly implies that a deal with Apple might not be mutually beneficial. I would disagree. China Unicom has had ample opportunity to conduct their due diligence and analyze the market opportunities that iPhone presents. To conclude that China Unicom may be taking steps that will not be in their long-term best interest is, in my opinion, an underestimation of China Unicom executive management’s business savvy. I would agree with your point that any successful negotiation with Apple would require that the iPhone (Apple) retain control over many core wireless value added services (WVAS), such as iTunes and the Apple App Store. However, I think you will be surprised to find how ready, willing, and able Apple is to make strategic compromises to better serve Chinese wireless consumers.

iphone-china-unicom-11I believe in the long run, focusing on what’s best for the Chinese consumer, will prove to be the winning strategy for China’s wireless telecom companies. In the past, many carriers imposed their will on handset manufacturers. Many phones were customized to suit the carriers’ branding and proprietary services. Industry insiders often referred to these customized handsets as “crippled phones” due to their ability to serve only one master … the carrier.

steve_jobs_iphoneThat was then, this is now. On January 9, 2007, during the MacWorld Keynote, Steve Jobs unveiled the iPhone, the first truly “smart” mobile device to converge cellular service with music (iTunes) and the real Internet (not a WAP). Millions of consumers were immediately smitten. Of course iPhone did not receive uniform praise. The loudest “boos” came from competing manufacturers/carriers and their paid “media savvy” consultants. But the consumer wasn’t listening to pundits and critics. All they had to do was pick up an iPhone with its vibrant screen, Safari browser to the real Internet, highly intelligent and intuitive user-interface (no manual necessary), and they were convinced. It was a “must have.” What’s more, the iPhone is not a prisoner to fix buttons. It is designed to evolve. Evolution is part of Apple’s promise to buyers; a promise that Apple has delivered on again and again. My own 1st generation iPhone has now been (easily and at no cost) upgraded multiple times and I’ve downloaded dozens of cool and fun applications.

800 million downloads!

800 million downloads!

I am not alone in enjoying the iPhone evolution/revolution. Over 17 million iPhones have now been sold and as of March 17, 2009, after only 8 months of operation, an astounding 800 million applications have been downloaded from the Apple App Store hosting over 25,000 applications. And now the 3.0 OS upgrade will take iPhone to a whole new level. The game changed forever on January 9, 2007. A paradigm shift is underway and mobile communications will never be the same.

Back to the key question you raised in your article… “Who can or should control the WVAS?” Right now everyone (carriers and OEMs) is charging full-speed ahead to build their own app store and proprietary value-added services. Some may succeed, and others will no doubt waste 10s of millions in a vain effort to create a winning platform. I believe carriers that elect to build their own WVAS and also embrace smart phone manufacturers’ WVAS will wind up the winners. This openness will also make for happier wireless consumers.

I am not privy to any of the plans or strategies that may have come from current Apple and China Unicom negotiations. One might imagine that China Unicom will pursue their own WVAS while at the same time allowing iPhone subscribers to enjoy many of the current Apple services. Apple and China Unicom can learn from one another and forge a successful partnership. This partnership can be financially rewarding for both Apple and China Unicom. Most importantly, Chinese wireless consumers will be the biggest beneficiaries of this partnership.

Consider that Apple has gone to great lengths and expense to make the App Store a true e-commerce vehicle for developers who receive a 70% share of all application revenues. There is no question in my mind that

iPhone integrated with peripheral

iPhone integrated with peripheral

Apple would work closely with China Unicom to ensure that there are a wealth of “for China” applications on Apple’s China App Store. I suspect that several new iPhone applications will be developed directly by China Unicom, who’ll receive at least 70% of the revenue. One or two of these applications may even be preloaded on an iPhone for China Unicom. After the iPhone 3.0 OS release, applications can be developed with “in app” purchase options (e.g. online magazine subscriptions, city guides, etc.). There are also now many ways an iPhone can interact with peripheral devices. This presents additional opportunities for ongoing revenue for businesses and developers and greater “value-add” for Chinese iPhone users.

The bottom line… China Unicom’s Apple deal can be very sweet indeed.

More background on Apple and China Unicom iPhone negotiations …

NOTE: The following is based on my research together with a large measure of outright guesswork. In other words, my analysis should be filed under “rumor,” “speculation,” and “opinion.”

Gang Li

Gang Li

A China Unicom executive contingency, led by Executive Director of Mobile Communications Gang Li, arrived in Cupertino on Sunday, March 8th for meetings with Apple. The objective of this summit was to move iPhone negotiations to a serious level. The negotiation points likely included:

  • The issue of a subsidy payment from China Unicom to Apple for each “on contract” iPhone.
  • The issue of WiFi and China’s WAPI security standard. Apple may be required to disable WiFi on iPhone in China. This would not be unprecedented. Apple has already disabled WiFi for iPhone in Egypt.
  • The issue of exclusivity. Whether China Unicom will have exclusive carrier rights in PRC and whether any “exclusive” will be limited to “3G” or to all iPhone models and any other Apple 3G enabled mobile device (3G tablet).
  • Whether Apple will agree to pre-load iPhone with applications that are popular in China (e.g. Youku vs. Youtube).

A recent report via ccw.com.cn (传联通就引入iPhone达成协议) indicates that the China Unicom

iPhone 3.0 OS

iPhone 3.0 OS

delegation remained in discussions for a full two weeks and did not return to Beijing until the evening of March 18. It is therefore quite possible that the China Unicom team was in town for the Apple 3.0 presentation (< watch) delivered at Apple’s HQ in Cupertino on St Patrick’s Day (March 17). My guess is that the China Unicom executives were sequestered in the upstairs conference room (above Apple’s Town Hall facility) where they could watch the iPhone 3.0 event by closed-circuit television. This extra discretion would be important as the national media was invited to the 3.0 event and a group of well-dressed Chinese gentleman would raise journalists’ curiosity, and might cause the press to connect the dots to China Unicom. Apple and China Unicom would prefer that any “deal” remain a secret until all formal agreements and China Ministry (e.g. MIIT) approvals are signed sealed and delivered.

What are the final steps? The deal may be concluded after the Ministry of Industry and Information Technology (MIIT) gives iPhone its official approval (soon). There have been reports that Apple provided China Unicom with a non-WiFi iPhone for final MIIT tests. Another key step might be an Apple visit to

China Unicom Chairman Chang Xiaobing

China Unicom Chairman Chang Xiaobing

China. My guess is that a group of senior Apple executives will travel to Beijing to meet with China Unicom CEO Chang Xiaobing and other executives. This would be a professional courtesy and show of respect for the China Unicom delegation that recently visited Cupertino. It would also be an opportunity for Apple to meet with Lou Qinjian, Vice Minister of China’s MIIT. There is also the possibility of a side trip to meet with China Mobile CEO Wang Jianzhou and continue those “cooperation talks” that we’ve heard so much (or so little) about. Spring is a nice time of year to visit China. There are sites to see after all.

May 17 for an announcement with a launch this summer?

There have been several reports suggesting that an official iPhone agreement between Apple and China Unicom could be announced on May 17. This is the same day that China Unicom will be launching, on a trial basis, the new W-CDMA 3G network in 55 major Chinese cities. The full network (283 cities) rollout will not happen until the end of 2009. May 17 appears to be about the right timeframe to make an official “iPhone in China” announcement; however, an iPhone launch may need to wait until the summer months. Apple’s Worldwide Developer Conference is often scheduled for mid-summer and that might be the right forum to unveil new iPhone models. I would not expect a China launch until Apple has formally unveiled their “gen 3” mobile devices. It should be a busy summer in Cupertino and in Beijing.

What’s going on between Apple and China Mobile?

china-mobile-iphone-3g11As for the prospects of an iPhone deal with China Mobile … A “3G” deal looks doubtful, a “2G” deal is possible, and a “4G” deal will likely remain an open topic of discussion.

I agree with part of the statement you made in your article; “Apple clearly stated that it will not include TD-SCDMA functions in its handsets, which totally ended negotiations.”

I know that Apple has not commented on TD-SCDMA and I doubt that China Mobile would ever publicly admit that TD-SCDMA 3G is a “deal breaking issue.”  However, I absolutely do believe that TD-SCDMA network concerns have been a major factor in Apple’s decision tree. More on TD-SCDMA issues later…

The public reasons (leaked to Chinese media) given for Apple and China Mobile’s failure to come to terms have been over control of the App Store and WVAS. It appears that China Mobile pushed hard in an effort convince Apple to remove services from the iPhone (no WiFi, no App Store, no iTunes, etc.) in favor of China Mobile’s own WVAS. If the press rumors are true, Apple said “No!” I don’t blame them. A “stripped down” iPhone morphs into something that Apple would not want to call “an iPhone.” It’s really that simple.

Apple cooperation talkscontinuing with China Mobile? …

China Mobile CEO, Wang Jianzhou

China Mobile CEO, Wang Jianzhou

Despite divergent views over who (Apple or China Mobile) should control WVAS on iPhone, and TD-SCDMA concerns, I am not sure that discussions have “totally ended.” According to China Mobile CEO Wang Jianzhou, Apple and China Mobile are (or were) “still talking” under a non-disclosure agreement (NDA). An interesting quote on March 5 from China Mobile CEO Wang Jianzhou: “We hope the iPhone can be used on China Mobile’s network, and Apple has demonstrated its will.”

What might be going on in these reported “talks?” I honestly have no idea. It could be something big, something small, or nothing at all. Here are a few possibilities:

  • Apple and China Mobile could be discussing an EDGE 2.5 G iPhone Nano (iPhone Nano [if it exists] might be a 2.5G model, and this might not conflict with a negotiated “3G” exclusive for China Unicom)
  • China Mobile may be discussing a future TD-LTE Phone 4G (at least 18 months down the road)

China Mobile may also be considering ways to retain existing iPhone users. China Mobile has approximately 1,000,000 iPhones now running on their EDGE 2G network. At least ½ of those are the new iPhone 3G and many of these handset owners are not on contract (290 million of China Mobile’s 463 million users are pre-paid and can freely switch carriers). If China Unicom lands the iPhone, they will no doubt attempt to entice existing iPhone 3G owners to “upgrade” to 3G.

picture-121

China Mobile going for full control of WVAS…

logopicture-9China Mobile has made no secret of their intent to build their own app store (to be called “Mobile Market”) and promote their own WVAS platform – Monternet, including music services (www.12530.com) and a Web 2.0 platform (similar to Mobile Me). China Mobile made 27% of their revenue in 2008 through their WVAS and they don’t want any leakage to handset manufacturers.

As you noted, China Mobile has already launched R&D for its own Android powered mobile operating system, jointly with cell phone producer Lenovo. The new MOS has been dubbed Ophone. With its own operation system, China Mobile can install more services of its own. China Mobile has also paid Topssion and Accenture plenty of RMB to work

Levono Ophone

Levono Ophone

on customization plans for TD-SCDMA 3G handsets and perhaps to continue feed them ideas they want to hear … “you can build your own mobile OS and app store just like Apple … and here’s how can we help” (more Accenture projects and billable hours… yes, I’m a cynic).

Nokia’s concerns offer clues as to why Apple said “No” to a customized TD iPhone 3G…

news1_01This effort to integrate TD-SCDMA handsets with China Mobile’s own mobile operating system and WVAS is an expensive and risky proposition. Nokia has apparently balked at pouring their own money into this initiative. Consequently, earlier this month, China Mobile revealed that it would invest 600 million RBM with Nokia and other handset manufacturers on research and development on TD-SCDMA handsets. Why is the most dominant wireless carrier in the world (China Mobile with 463 million subscribers) dolling out R&D money to handset producers to build TD-SCDMA phones? Especially to Nokia who has dominant market-share in China (37% of handset sales in China are Nokia) and has invested heavily in maintaining good standing with China Mobile? Serious question. Why? You’d think Nokia would be falling all over themselves to rush deliver a new TD Nokia 3G phone for China.

TD-SCDMA Handsets

TD-SCDMA Handsets

A large part of that answer may rest in the fact that China Mobile has an obligation to China’s Ministries to rollout the “indigenously innovated” TD-SCDMA 3G network. And yet China Mobile is now rushing development of TD-LTE 4G as fast (and quietly) as they can. CMCC will no doubt spend whatever amount is necessary to stabilize TD-SCDMA, but its future is far from certain. The tenuous future of TD-SCDMA may be a primary reason why Nokia will not take on further TD-SCDMA handset development without a cash stipend. A secondary reason may be the substantial WVAS customization China Mobile is insisting upon, along with the integration of China Mobile’s new “on the drawing board” Ophone. This is a terribly expensive undertaking for Nokia with no assurance that the customized (“crippled”) TD handsets will sell.

Why Apple said “No” to TD-SCDMA…

In your article, you questioned why Apple balked at an agreement to build a TD-SCDMA handset. In my mind, this was a “no brainer” decision for Apple. It’s my belief that Apple went to great lengths to give the nascent TD-SCDMA 3G protocol a trial, including dedicating engineering resources and possibly some design/build efforts. But any special TD iPhone 3G model is likely to remain under “lock-in-key” in the engineering vaults in Cupertino.

cmcc-tdscdma-logoWhy would Apple say “No” to TD-SCDMA 3G? …

  • China Mobile’s “end run” rush to build TD LTE 4G is a statement that TD-SCDMA may have a very limited life span (2 years or so).
  • TD-SCDMA is based on now “dated” Nokia Siemens technology.
  • Network usability problems continue (dropped calls and interference near tall buildings).
  • TD-SCDMA 3G iPhones would not be usable outside of China, albeit they would likely be backward compatible to 2G EDGE networks.
  • China Mobile has blamed the current crop of TD-SCDMA handsets for network usability problems. Would China Mobile reverse this “blame the phone” tactic should Apple launch a TD iPhone 3G? Not likely.
  • Apple understands very well that network bugs can tarnish the reputation of handsets.
  • Apple does not want to have their debut in China spoiled due to network reliability issues.

Despite the possible conflicts over WVAS and TD-SCDMA, it is my hope that Apple and China Mobile can find common ground and a basis to work together. A large cross-section of China wireless consumers are using China Mobile’s network and services. Whether it be a 2G iPhone Nano, or a 4G TD LTE model, it would be great to see two of the world’s most respected companies (Apple and China mobile) working together.

Thank you again for your article. I enjoyed reading it and appreciate your point of view.

Respectfully,

~ Dan Butterfield, Editor, iPhonAsia 

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China Mobile’s Nianshu Gao Quoted at Industry Conference re Apple and iPhone

China Mobile has trotted out several spokespersons to unilaterally offer up “talks have ended” statements to the press.  These official statements were succinct:

Statement 1: November 30, 2007:

“iPhone model is not suitable for China,”

Statement 2: January 14, 2008:

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“We have held talks with Apple to launch the iPhone device in China. However, those talks have ended.”

Apple spokespersons have consistently responded to these China mobile statements with a “no comment.”  The notable exception being Steve Jobs’ comment during a January 15, 2008 interview with CNBC’s Jim Goldman.

steve_jobs.gifSteve Jobs: “It’s very strange … we’ve met once with one of their representatives.  There have never been any ‘hot and heavy’ discussions either ‘on’ or ‘off’ … someone is just making this stuff up.”  See Video Here 

There has been minimal follow-up commentary from the China Mobile spokespersons … “We have no other news to report,” China Mobile spokeswoman Li Honghui told the Associated Press.  Yet there have been a few bright slivers of light shining through this partially closed door. When pressed by reporters, China Mobile spokeswoman Rainie Lei would not elaborate except to say that China Mobile “has not ruled out reviving discussions at some stage, if necessary.”

A handful of reporters sought out comments from higher sources … and they’ve been rewarded for their efforts.  China Mobile’s Deputy General Manager of Data Services, Gao Nianshu, has been the most talkative. Mr. Nianshu was speaking at an industry conference and was quoted (apparently to his displeasure as he felt his comments were off the record) as saying that negotiations were terminated because Apple “wanted to become the controller of the value chain” (i.e. gain a share of subscriber revenues).

  Nianshu noted that Apple was seeking a “20% or 30%” share. He said discussions with Apple did not go very far. Nianshu  said Apple argued that because it (Apple iPhone) was offering an end-to-end solution, including content and mobile applications, operators should share their revenue.  “Of course we disagreed, not because we want to control this value chain, but because we consider the value chain should exist and be developed by all.”  Nianshu went on to say that Apple’s strength was as a handset provider, with good data connectivity and browsing but weak voice functionality.  “This shows its specialty as a traditional IT equipment company: the telecom side is not what it is good at.”  Nianshu  said the companies (Apple and China Mobile) took part in at least two (2) rounds of talks.  He went on to say that Apple iPhone’s current lack of MMS was a point of contention.  Despite the failure to agree, Nianshu revealed preparations were underway for further negotiations between China Mobile and Apple.

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Reuters updates iPhone in China story

The initial (Jan 15, 2008) Reuters headline grabber … “Our parent has terminated talks with Apple over the iPhone,” a China Mobile spokeswoman (Rainie Lei) said, confirming several unsourced Internet reports.

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Reuters Update 2

RESURRECTION?

Lei would not elaborate except to say that “China Mobile had not ruled out reviving discussions at some stage, if necessary.”

It is unclear what Apple, which has declined to comment on the issue, planned to do in China next. Apple was not immediately available for comment.

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