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 judgment, 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)
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.
Disclosure: No positions