The 2 Biggest Risks to Apple Winning With China Mobile


Apple's deal with China Mobile has been lauded far and wide by the tech community (myself included). There's little question that Apple now being able to sell its ever-popular iPhones to China Mobile, the world's largest telecom company by subscribers, will prove a positive for Apple investors. Heck, over the long term, this deal should provide Apple tens of millions of new iPhone sales.

Source: Apple

So, what could go wrong?While I hope it's clear that I firmly believe in this deal's big ticket potential over the next several years, there are also several key issues for China Mobile and Apple that could keep the two companies from reaping the full benefits of one of tech's most high-profile deals in recent memory.

Let's take a look at two of the greatest possible risks to keeping the deal from reaching its full potential.

No. 1: 4G availability on China Mobile
Let's face it... smartphones really aren't much good without a network to power them. And while brutally obvious, the present limited deployment of China Mobile's 4G network could mean that Apple's iPhones would work in only 16 major cities when the iPhone comes to China Mobile in January. Granted, many consumers in these cities are generally wealthier and more technologically inclined, making these first markets the cities where Apple could see the most success. However, these 16 cities only represent a fraction of China Mobile's 763 million total subscribers.

China Mobile should have this issue largely eliminated by the end of next year. By the end of 2014, China Mobile has said its 4G coverage will reach 340 cities, and a population of 500 million subscribers, so this issue should be largely mitigated. However, especially in the near term, the lack of adequate coverage could prove a drag on Apple's overall iPhone sales on China Mobile.

No. 2: Subsidy support from China Mobile
Subsidies from telecom companies like China Mobile are a key ingredient in winning in the smartphone space, and that should be no different for Apple's iPhone on China Mobile.

There's no question that smartphone subsidies are a winning recipe for both smartphone makers like Apple, as well as telecom providers like China Mobile. By eating a portion of the upfront handset cost, telecom companies drastically lower the purchase price of smartphones for consumers. This spurs greater smartphone sales volume for OEMs like Apple, while pushing consumers toward more lucrative data-rich plans for the telecom providers -- a win-win.

And, while being able to drop the cost of Apple's iPhones from, say, $649 in the case of the cheapest iPhone 5s, to $199, has done wonders for sales in developed markets, subsidies could play an even more pivotal role in emerging markets like China, where smartphone average selling prices are roughly 38% lower than developed markets. It's also worth noting that items like Chinese import duties push the cost of Apple's iPhones up even further. For instance, the cheapest iPhone 5s costs the equivalent of $866 in China, making the possible impact of attractive subsidies all the greater for Apple.

As of right now, it isn't exactly clear just how large a subsidy China Mobile plans to provide for Apple's iPhones when they officially go on sale in January. And, in typical fashion, both Apple and China Mobile remain silent on the matter. Regardless, the amount of subsidy China Mobile is willing to provide Apple will without question impact how the iPhone sells over the telecom giant.

Deal or no deal
These are certainly potential overhangs that investors in either company need to watch carefully. However, as alluded to above, this deal should clearly be a major win for both Apple and China. Apple has its hands trying to fend of Samsung and a handful of domestic Chinese names that are gaining steam in the Chinese smartphone space. Likewise, China Mobile has its hands dealing with smaller -- and in some senses scrappier -- rivals China Telecom and China Unicom, both of which have sold the iPhone for some time now.

Some of these issues, a la the pricing, are still evolving, but as always, we'll be sure to keep our readers up to date on how Apple's latest mega deal unfolds in the weeks to come.

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Fool contributor Andrew Tonner owns shares of Apple. Follow Andrew and all his writing on Twitter at @AndrewTonner. 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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