IPhone in China: China Mobile or China Unicom?

Opinion by Sherrie Huang, analyst at Ovum

The iPhone distribution negotiations between Apple and China Mobile were first reported in 2007. While many expected to see the two shake hands, no deal has yet been announced and it is now rumoured that Apple will partner with China Unicom instead. What is interesting is how the competitive environment will influence any cooperation.

The pros and cons of Apple and China Mobile's possible deal

There are benefits for both parties in such a deal. For China Mobile, the deal will help it to increase its brand value. Given the iPhone's strong appeal among high-margin subscribers - Apple sold 6.9 million units of its 3G iPhone within the first quarter of its availability (ended 27 September 2008) - China Mobile would be able to compete more effectively. In addition, there is already great interest in the iPhone in China. For example, China Mobile reported that there were about 400,000 iPhones - bought via the grey market - being used on its network at the end of 2007. Therefore, we estimate there are currently over 1 million iPhones in China

For Apple, China Mobile's huge subscriber base and the growth prospects of the mobile content and application market make this deal irresistible. According to the MIIT, there were 641 million mobile subscribers in China by the end of 2008, with China Mobile claiming a market share of 71%. The mobile penetration rate in China is still less than 50%, providing huge potential for further growth. Moreover, we forecast that wireless multimedia service revenues in China will exceed $11.5 billion by 2010.

However, there are significant barriers to this deal. Although Apple is no longer insisting on the iPhone revenue-sharing business model that it initially pushed for, it still has other firm requirements including iPhone subsidies from the operator, no SIM locking, use of the iTunes music store, and the Apple App store being positioned as the central buying location for value-added services. China Mobile is unlikely to make concessions to meet Apple's expectations and relinquish control of the mobile content and application value chain given that it is developing its own application store.

Another barrier lies with TD-SCDMA. The 3G licence that China Mobile was awarded is for TD-SCDMA, while the 3G iPhone supports WCDMA. To develop an iPhone supporting another standard would be costly and time-consuming, with limited scale advantages.

China Unicom can leverage the maturity and scale of WCDMA/HSPA

Since receiving the WCDMA licence, China Unicom has accelerated negotiations with Apple on iPhone distribution. If a deal can be struck, China Unicom will probably launch the iPhone together with its 3G network in the first batch of cities in May 2009. However, China Unicom's 3G network deployment is much further behind and slower than that of its peers. With the government's support, by December 2008 China Mobile had already covered ten key cities with 340,000 TD-SCDMA subscribers. China Telecom is upgrading its CDMA network to 3G EV-DO. However, China Unicom must build a WCDMA network from scratch.

China Unicom's strategy to fight back is to leverage the maturity and scale of the WCDMA/HSPA ecosystem. A possible deal with Apple would give China Unicom an effective weapon to compete.
China Unicom is most likely to win the deal

If Apple cooperates with China Mobile and a TD-SCDMA version of the iPhone is developed, the TD-SCDMA ecosystem could benefit from a new supporter. A possible way forward may be to launch current iPhones first (albeit on GPRS/EDGE networks, as in places such as India), followed by an iPhone TD-SCDMA version at a later date. However, one major obstacle remains as Apple may need to allow China Mobile some control over its App Store.

If Apple chooses China Unicom it might achieve a deal more like it has elsewhere. In addition, China Unicom will make more concessions than China Mobile, and the deal means limited or no changes to its iPhone hardware or business model - saving costs and reducing risks. Although probably in a reduced capacity, the cooperation would still open the door for Apple to enter the huge China market. It also gives China Unicom a competitive weapon in the high-value subscriber segment. In our view, the latter outcome seems most likely at present.

Posted to the site on 23rd February 2009