China Mobile (
CHL
) has yet to get the iPhone but that isn't stopping it from blowing
away the competition with record 3G subscriber additions in recent
months. The largest wireless carrier in the world took the market
by surprise for the second consecutive month, announcing the
addition of a staggering 7.05 million net 3G subscribers in
January. This follows the 5.5 million net 3G subscribers China
Mobile had added during December. Both of these months have seen a
disproportionate number of 3G subscriber additions by China Mobile
as compared to the average of about 3 million in the previous
months. A big chunk of these net adds are likely to have come from
its existing 2G base, which declined by about 2.7 million during
the month. The surprise, however, didn't extend to China
Unicom (
CHU
) and China Telecom (
CHA
), who followed the historical trend with net 3G additions of about
3.7 million and 3 million respectively.
That China Mobile's relative outperformance has come about
despite not carrying the iPhone 5, which was launched by the other
two carriers in December, is even more surprising and may have
serious ramifications both in the context of the Chinese
wireless industry as well as Apple's (
AAPL
) strategy going forward. While it may be prudent to not let just a
couple of months' strong showing cloud our judgement, we expect it
to have an upper hand in its ongoing subsidy negotiations with
Apple if China Mobile is able to sustain the same over the coming
months. (see
Apple's China Potential Could Be Limited By A
Subsidy Compromise With China Mobile
)
See our complete analysis of Apple here
Absence of a China Mobile deal hurts Apple
It is too much of a coincidence that China Mobile is reporting
its best-ever 3G additions in the months following the iPhone 5′s
launch on rival carriers. What we believe is happening here is that
many of China Mobile's subscribers, who were deferring their
smartphone purchases in anticipation of the carrier's deal with
Apple, are realizing that the deal isn't happening anytime soon and
are buying rival Android smartphones or Windows Phones instead.
The pent-up demand for the iPhone was immense given that Apple
posted its best-ever iPhone launch in China last month, posting
sales of over 2 million units in the opening weekend itself. The
customers that jumped ship due to the absence of a China Mobile
deal are definitely a lost opportunity for Apple to gain market
share, putting additional pressure on the company to sign a deal
with China Mobile soon. At the same time, Nokia's Lumia 920T sales
at China Mobile are likely to be benefiting from this trend.
With the smartphone market in the developed regions getting more
saturated (U.S. smartphone sales grew y-o-y by just 9% in Q2
2012) amid concerns that iPhone innovation has plateaued, Apple
needs emerging markets such as China to drive iPhone growth in the
coming years. The smartphone market in China is growing in
leaps and bounds and has already surpassed the U.S. as the largest
smartphone market by volume. This is an incredible statistic
given that 3G penetration in China stands at a little over 20%
currently. Considering the huge 2G subscriber base that the Chinese
carriers are looking to upgrade to 3G, the potential for Apple to
ride the boom is huge.
What Apple Can Do
A deal with China's biggest wireless carrier will therefore give
Apple the best proxy to the country's huge potential but the
same may entail a lower subsidy agreement with the carrier. (see
Apple Could Have A $750 Fair Value If China Mobile
Deal Works Out
) This may alone not have a big impact if Apple is able to tap
China Mobile well enough to grow unit sales but it does set a bad
precedent for other carriers in China as well as the rest of the
world down the road.
Another strategy, of which there have also been rumors, is
for Apple to consider a cheaper iPhone. While we think such a
move may dilute Apple's brand and prove counterproductive in the
developed markets, doing so for the emerging markets without
compromising much on the build quality and margins (in a move
similar to the iPad mini) may not be that bad an idea. This will
not only help decrease the per phone subsidy costs but also make it
easier to bring aboard China Mobile. Moreover, with the mobile war
moving on from premium hardware to that of the ecosystems, the move
will help get more customers onto the iOS ecosystem and build a
base for the sales of future mobile devices it creates down the
road. Perhaps, it is time for another innovative product from the
Apple stable.
Understand How
a Company's Products Impact its Stock Price at Trefis