After Tim Cook's trip to China last week, rumors of an impending
deal between tech-giant Apple (
) and telecom China Mobile (
) have flooded the internet.
[caption id="attachment_65572" align="alignright" width="300"
caption="The iconic Apple store in Shanghai's Pudong district"]
With discussions supposedly stalled over a number of issues, in
order to reach an agreement, one side will likely have to
compromise to ensure the completion of a deal. This begs the
question: who needs who more?
Apple's share price has faded over the past few months, so
investors in the stock have been looking for a catalyst to power
shares higher before earnings are released later this month. Many
have looked to China to provide a boost. While the company's iPhone
5 debuted to spectacular demand last month -
despite some misinformation indicating otherwise
- the product release did little for Apple's stock.
As Cook arrived in China and met with the head of China Mobile,
a new potential China-related catalyst emerged: a deal with China
Mobile and its roughly 700 million subscribers could see
Apple shares jump.
However, as I've argued before,
drawing such conclusions is overly reductive
. Although China Mobile has the largest mobile subscriber base in
the world, Apple is unlikely to see but a small fraction of those
The majority of China Mobile subscribers are on pay-as-you-go
plans on "dumb phones." These people are members of China's lower
and emerging middle classes, and at this point in time do not have
anywhere near enough discretionary income to afford Apple
Second, many Chinese customers aching for an Apple phone long
ago fled to China Unicom (
) and China Telecom (
), both of which already offer the iPhone 5. Third, roughly 15
million iPhone users are already on the China Mobile network using
unlocked phones and are unable to access the carrier's 3G
The second and third point illustrate not only why the benefit
of a China Mobile deal for Apple would be limited, but also why
such an agreement would be more beneficial for China Mobile. The
losing lucrative 3G market share
to China Unicom and China Telecom. Even if the iPhone's popularity
fades in the future, customers that have already switched are
unlikely to return to China Mobile, barring a sea change in the
mobile phone landscape.
As well, Apple would not see its customer base broaden
substantially by having existing iPhone customers on China Mobile's
network obtain formal access to the 3G and 4G services. On the
other hand, China Mobile would benefit from having an additional 15
million subscribers paying for more lucrative 3G/4G services.
So while Apple would certainly see some new customers as a
result of a deal with China Mobile, it's increasingly evident that
such a deal would be more beneficial to China Mobile. As a result,
look for China Mobile to potentially back down from its revenue
sharing demands in negotiations with Apple and see a deal done
sooner rather than later.
While Apple shares may pop on the deal, don't expect the
addition of China Mobile to the iPhone family alone to result in a
drastic increase in China sales. Apple's popularity in China
continues to surge and it continues to be a growth story going
forward; this reason, and not a China Mobile deal, is Apple's China
Disclosure: Author is long AAPL; family is long CHL