How to Look at the Apple-China Mobile Deal

How to Look at the Apple-China Mobile Deal

Since the recently announced deal between Apple and China Mobile , there has been a ton of media coverage portraying the news in both a positive and negative light. Those bullish on the deal are quick to quote facts such as "China Mobile's subscriber base is roughly seven times as large as Verizon's, the largest U.S. carrier."

At the same time, critics of the Apple/China Mobile euphoria say that Apple's phones are simply too expensive to have a significant impact on the Chinese smartphone market, and that rivals like Samsung will outmarket Apple. While the actual performance of the iPhone in China remains to be seen, let's take a step back and look at this development from the standpoint of responsible investors: with a long-term timeframe.

First the good news
The Apple bulls are excited, and rightfully so, about the sheer number of mobile phone users this deal gives the company access to. There has been tons of figures issued by analysts, and while there are some estimates that are extremely low, most seem to agree that Apple should expect to add between 12 million and 20 million new activations in 2014. All of which should come as a direct result of China Mobile (it already has about 45 million iPhone users), and this should produce around $3 billion of additional revenue for Apple.

But, it may be a slow start for Apple in China
Some are skeptical though about whether the iPhone 5c and 5s will be successful in China, given that over 88% of China's smartphone buyers spent less than $500 on their phones, well below the Apple devices' respective price tags of $737 and $868. There are indeed a large number of consumers in China who can afford the phones, but after the initial sales die out, there is concern over whether Apple will remain competitive in the Chinese market.

Samsung is the biggest threat to Apple establishing a competitive market share with China Mobile's customers, and its marketing spend is the highest in the business at 5.4% of its total sales (as compared to just 0.6% for Apple). So, it is a legitimate concern that the 12 million to 20 million expected new activations will cost Apple significantly more than the company expected in terms of marketing dollars.

The major delay for the deal getting done was the lack of a reliable network for iPhones. China Mobile's 3G network is relatively unreliable and is not compatible with Apple products, which means that current iPhone users have been stuck using 2G connections. With the rollout of China Mobile's 4G services on December 18, Apple products (and other smartphones) will finally be able to perform to their capabilities.

However, the question remains if the anticipated new sales in China will come as a result of existing China Mobile subscribers upgrading, or if the company will simply be stealing customers from the other carriers in China, such as the second-largest carrier China Unicom . The other carriers in China have carried iPhones for some time now, and have seen so-so results. The early sales figures have indicated that sales of the 5s and 5c are somewhat weaker than the iPhone 5. It remains to be seen if demand is dropping or if people were holding out for China Mobile.

What the deal really does for Apple, and why investors should care
Regardless of what happens over the next couple of years, investors should take a moment to appreciate what this deal will really mean for Apple: It allows it to remain a growth company for years to come. China's smartphone market is still very young, and the percentage of subscribers who can afford higher-end devices, while greatly improved in the past decade, is still very low when compared to U.S. consumers.

As the middle class in China continues to grow and to upgrade their quality of life, Apple will see a steady stream of new customers who want to own the latest iPhone, iPad, or whatever other devices Apple has in its pipeline. Those who are hoping for instant gratification from this deal, that Apple will be instantly catapulted back to the $700 per-share price range, will likely be disappointed. However, those in it for the long haul will be very pleased with the amount of business Apple gets from China over the coming decades and beyond.

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Matthew Frankel owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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