Apple Finally Scores China Mobile
After market close yesterday, The Wall Street Journal reported that the much-vaunted China Mobile deal -- which is expected to open Apple up to the carrier's nearly 760 million subscribers -- had been signed . While such a deal has been expected for quite some time, and while it's almost certainly baked into the share price to some degree, the actual impact of this deal on the company's financials is still unknown. There's plenty of upside potential, but at the same time, it pays to remain cognizant of the fact that this isn't a slam dunk for Apple and its shareholders. Indeed, this deal simply allows Apple to compete more freely in China.
This deal opens up China
It's no secret that, while Apple's penetration in a number of developed markets (most notably the U.S.) has been exceptionally strong, it could most assuredly do better in China. Without a subsidy agreement with China's largest carrier, it would be exceptionally difficult for Apple to gain meaningful share in China (remember, an iPhone 5s off contract starts at $649 in the U.S.). However, with the country's largest carrier offering iPhone subsidies, it's not hard to imagine that China's handset market is now significantly more open to Apple.
Does this deal fix everything?
The obvious question now is just how meaningful this deal will be. While the carrier has 759 million subscribers, it's important to note that only 176 million are actually 3G subscribers (those are the folks most likely to buy higher-end handsets). With the Apple/China Mobile deal roughly timed with the rollout of LTE networks (which should augment and then eventually replace the 3G networks over time), it's fair to assume that roughly 23% of the China Mobile subscriber base is actually open to Apple for the foreseeable future.
This isn't a trivial number by any means. Apple sold 33.7 million iPhones in its most recent quarter, but it's important to maintain realistic expectations. Local handset vendors in China such as Xiaomi (which reportedly outsells the iPhone in China) and Lenovo are rather entrenched and have built extremely strong brands there. It's also tough to forget Samsung's major presence in China and its willingness to spend an obscene amount on research, development, and marketing to appeal to every consumer preference possible.
A mix question
The iPhone is finally coming to China Mobile, and what type of product mix Apple sells here will be key. Will the very highest-end iPhone dominate the mix, or will the more modestly priced 5c and the value-priced 4s take the majority of the sales? While it would be great for Apple if tens of millions of China Mobile subscribers bought the latest and greatest iPhones, it would still be an undisputed win if the company was able to expand its presence in China through its lower-end models. The iPhone deal is coinciding with the rollout of 4G networks later this month, which suggests that China Mobile will initially be limited to the higher-end 5s and its cheaper cousin, the 5c.
Foolish bottom line
This deal is certainly a positive, although it is clear from the stock's relatively modest post-announcement increase that the China Mobile optimism was mostly baked in. While this deal doesn't guarantee that the company will see a massive explosion in revenue and operating profit, it does indicate that Apple now has a real shot at winning the sales of China Mobile subscribers who have wanted an iPhone but couldn't get one since it wasn't offered with a subsidy. It will be interesting to see how initial sales go, and just what mix of iPhones Apple sells in China during the first few months following the deal.
The article Apple Finally Scores China Mobile originally appeared on Fool.com.Fool freelancer Ashraf Eassa has no position in any stocks mentioned. 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.