The Most Important Part of Apple's Deal With China Mobile Is Still Unknown
Apple's long-awaited deal with China Mobile has finally been announced. Starting next month, subscribers to the world's largest carrier will be able to purchase Apple's iPhone. Undoubtedly, this will result in more iPhone sales, but how many more remains to be seen.
Apple's share of the Chinese market has declined notably in recent years, as Samsung and other OEMs that use Google's Android have risen to dominate the Middle Kingdom. Without heavy subsidization, Apple could find itself remaining a token player in China.
How heavily will China Mobile subsidize the iPhone?
Both the iPhone 5s and 5c will go on sale through China Mobile starting Jan. 17, but exactly how much subscribers will have to pay remains unknown. Last week, Bloomberg reported that China Mobile planned to boost subsidies next year in an effort to drive smartphone adoption.
That would be terrific for Apple, as its expensive iPhones are largely unaffordable without carrier subsidies. China Unicom and China Telecom have both carried Apple's smartphones for some time, but cut their subsidies last year alongside the iPhone 5s' launch.
With the average Chinese family bringing in about $12,000 per year, Apple's iPhone 5s -- which retails for well over $800 in China -- is simply too expensive for most. Perhaps that's why Apple's share of the Chinese smartphone market has dwindled in recent quarters, down to about 6% -- it had been over 10% in 2011.
Samsung and other Android OEMs have gained at Apple's expense
While Apple's share of the Chinese smartphone market has declined, Samsung's has grown, from about 14% last year, to over 21% last quarter. Samsung's willingness to offer smartphones at lower price points likely allowed it capture a larger percentage of the market.
Samsung has also led the markets in phablets (smartphones with screens larger than conventional phones, but smaller than tablets), a category that's becoming increasingly important in China. Back in September, IDC said phablets were now outselling both tablets and PCs combined in Asia (excluding Japan).
China has also produced a number of its own Android OEMs, including Huawei, ZTE and Xiaomi, the later of which recently hired Google's former executive Hugo Barra. Like Samsung, these companies have been willing to produce larger phones at cheaper price points: Xiaomi's Red Rice smartphone sports internals comparable to Apple's iPhone 5c, but costs a fraction of the price -- just $130.
Chinese developer support could become a problem
Of course, the Red Rice runs a modified version of Google's Android -- if Chinese buyers want iOS, they have no choice but to go with an Apple-made handset. In the US, that's a huge advantage for Apple, as Western developers continue to favor Apple's platform, but in China, that could soon become a liability.
According to research firm Flurry, Chinese developers favor Google's mobile operating system. That's understandable -- with Apple's expensive iPhone holding just a token share of the market, Google's Android powers more than half the Chinese smartphones in existence.
It's worth noting that while Android dominates China, it doesn't do Google much good. Google's app store, Google Play, is virtually a non-factor in China (third party app stores are generally used) and heavily modified versions of Android are common. In short, the Google/Apple narrative Western investors are used to simply doesn't hold up in China.
How much will China Mobile subsidize the iPhone?
Apple's deal with China Mobile has been expected for months, and with the deal finalized, analysts will no doubt factor in millions more Chinese iPhone sales in 2014. But the most important part of the deal -- the iPhone's price -- has yet to be unveiled.
Apple investors should hope for heavy subsidies. Although Apple continues to sell millions of iPhones in China, its share has slipped as Samsung, and other OEMs using Google's Android, have undercut it on pricing. With Chinese developers throwing their support behind Google's operating system, Apple can't afford to be marginalized in China for too much longer.
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The article The Most Important Part of Apple's Deal With China Mobile Is Still Unknown originally appeared on Fool.com.Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. 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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