China Mobile, Apple Butt Heads Over iPhone

News now coming in suggests that China Mobile (CHL) and Apple (AAPL) couldn't reach an agreement on revenue splits. No surprise there. The odorless-feces-factor in the negotiating venue must have been off the scale.

There are three ways of looking at this:

1. Apple has been offered another thick slice of Humble Pie, and it needs to wake up and realize that it is no longer the only guy on the block.

2. China Mobile will regret this. Deeply.

And my personal favorite:

3. The parties walked away from the table because they don't really need each other to succeed.

China Mobile will continue to be the largest (and possibly most profitable) mobile operator in China in the coming years, so they're not worried about kick-starting their business in a hyper-competitive environment.

What is more, the operator has a long line of people coming to their shiny new headquarters on the 2nd Ring Road, hat in hand, with ideas on how their devices and services can bring China Mobile even more revenue without lifting a finger. All of which makes Mr. Jobs' model of "you-sell-our-phones-we-take-your-cash" seem just a little unappealing.

(Apple will get a different reception in Japan, where DoCoMo, KDDI, and SoftBank - for their own, seemingly perverse reasons (that of course make complete sense in a Japanese cultural context) have managed to create three services with the minimum of compelling differentiation. Of course, the Japanese are no slouches at bargaining, and you can bet that if anything they will restrain the iPhone from it's maximum level of success in the market by either restraining availability or jacking up the price. But we digress.)

Apple has several options:

1. Cut a deal with Unicom (CHU), who are increasingly desperate in their search for a decent partner (the problem with THAT, of course, is that as of this writing Apple is not offering a CDMA-based iPhone, much less a CDMA-based iPhone with a SIM-card slot, and CHU knoweth not GPRS.);

2. Wait until 3G rolls out in China and all (both) carriers are looking for ways to recoup their investments in network upgrades;

3. Go with one of the Hong Kong carriers, counting on growing China's already thriving gray market in unlocked/hacked iPhones.

4. Cave in and do it China Mobile's way.

My bet is on the waiting game, or a combination of #2 and #3). Apple has enough on its plate worldwide, ramping up production, working the bugs out of the iPhone, and bringing developers into the ecosystem.

In the meantime, Motorola (MOT), Nokia (NOK), Samsung, dopod, and the local guys creating iPhone look-alikes will be doing all they can to eat into the iPhone's potential market.

Indeed, we may find that the iPhone will radically increase the number of people in China willing to upgrade to a new and cool smartphone without even being in the market, creating a "halo effect" for the entire industry.

Comments

[reinharden]

You might want to do some fact checking.

China Unicom operates both a CDMA and a GSM system. They have 100M+ GSM subscribers and a substantially smaller number of CDMA subscribers.

I didn't bother digging up the most recent numbers, but this article from the summer of 2006 discusses their GSM subscriber base reaching 100 million:
www1.cei.gov.cn/ce/doc...

Of course, that you're using phrases such as "The odorless-feces-factor" pretty much makes it clear that objectivity and facts aren't really the goal of your article. So sorry if I've harshed your buzz by interjecting inconvenient and likely unwanted facts. ;-)

reinharden

2008 Jan 15 07:09 AM

[reinharden]

I suppose to be fair I should note that you said China Unicom doesn't know GPRS. So that they have 100 million GSM subscribers might not be relevant.

That having been said, China Unicom offers GPRS service in 250+ cities across China and claims that they'll have it enabled in "all" cities prior to the 2008 Olympics.

Nearly all current GSM base stations are capable of supporting GPRS. For most GSM service providers, it's just a matter of logistics and provisioning...which are not admittedly not necessarily easy matters in the countryside.

But I'm not convinced you were actually distinguishing between GPRS and GSM in your article since you were comparing to CDMA...

reinharden

2008 Jan 15 07:18 AM

[J.D]

Apple's options are probably limited given the lack of Chinese IP in their product - central planners will see too much risk that the iphone takes away from Chinese indigenous competitors, real or imagined. Also, isn't China Unicom set to be swallowed by SOE rivals in the coming telecom restructuring?

2008 Jan 15 07:20 AM

[jmmx]

JUST IN:

DJ Apples Jobs Says Speculation Of China Mobile Talks False
3:02 p.m. 01/15/2008 Provided by

NEW YORK (Dow Jones)--Speculation over Apple Inc.'s (AAPL) talks with China Mobile Ltd. (CHL) is overblown, Chief Executive Steve Jobs told CNBC on Tuesday.

One executive from Apple has flown to China, Jobs told CNBC. Rumors have cropped up that Apple is working with China Mobile to get the iPhone into China.

At the company's MacWorld Conference & Expo in San Francisco, Jobs said Apple has sold more than four million iPhones worldwide and 3.4 million iPhone in the U.S.

He also unveiled an ultra-mobile PC called the MacBook Air and an online movie download service that works with its Apple TV device.

Apple shares recently fell 6.6% to $167.

-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.c...

2008 Jan 15 03:28 PM

[mmii]

Have any of you been to China and tried to use anything but a CHL mobile phone/service? No way is Jobs going to let the CHL deal go. Unicom phone/service doesn't work anywhere and I don't think it will be fixed by the time the Olympics roll around. The company is a mess top to bottom. My money is on CHL and Apple!

2008 Jan 22 11:40 AM

[David Boettger]

reinharden: Nearly all GSM base stations are capable of GPRS, but they aren't necessarily capable of EDGE. iPhone usability (such as it is) is dependent on EDGE, which Unicom doesn't have. In order to be commercially-viable under the Unicom brand, the iPhone would need to be both CDMA/EVDO-capable and SIM-enabled, as David stated. As CDMA/EVDO has one foot in the grave, and presuming that EDGE won't be launched on Unicom's GSM network (until the net is hived off to Telecom or Netcom), a Unicom-Apple pair-up just in the cards which, I think, was David's main point.

2008 Jan 29 01:27 PM

[David Boettger]

With hacked iPhones so readily available in China, I wonder if Jobs (like Gates) isn't simply content on attacking the Chinese market guerrilla-style.

2008 Jan 29 01:32 PM

[David Wolf]

Reinharden: You're right that Unicom has a GSM network, and in fact they're well into rolling out their GPRS capability. All fine and good. The reason Apple would probably not be prepared to work with China Unicom is the user-experience factor.

See, if Unicom's GPRS network is so good, I wonder why my BlackBerry 8700 with an overseas SIM card can only find a GSM signal when it roams onto China Unicom's network here in Beijing and not a GPRS signal. I've had to force-select China Mobile on the device or lose all data services the second it gloms onto a China Unicom signal.

My wife's brand-spanking new RAZR2 V8 GPRS device - she's a China Unicom subscriber - is not getting onto a GPRS network at all anywhere in Beijing.

Does Unicom have GPRS? Maybe. But you wouldn't know it from OUR day-to-day user experiences in China's capital city, nor those of others who have commented on my blog or emailed me. Whether Unicom has the hardware or not is irrelevant if the network can't offer a consistent user experience on two GPRS devices from two major manufacturers.

Apple is going to be really sensitive about quality-of-service issues with carriers, a lesson it learned in going with AT&T in the United States. Unicom is in no position to truthfully offer a lot of comfort in that area, a sad legacy of its dual-network (GSM/CDMA) heritage.

How about them odorless feces?

2008 Jan 29 08:40 PM

[David Wolf]

jmmx: thanks for the post.

Methinks Mr. Jobs - he of the Great Reality Distortion Field - may well be downplaying what is likely an uncomfortable situation.

Here's my point - The iPhone does not need CHL right now, and CHL does not need the iPhone. As sad as that might be for all of us living here in the Middle Kingdom, them's the facts.

2008 Jan 29 08:45 PM

[David Wolf]

Boettger: Apple wage guerrilla warfare on the Chinese market? Oh, hell yes!

I saw an estimate yesterday that as many as 25% of all iPhones sold are hacked and never returned to the network that sold them. How many of those have made it into the hands of China's newly-prosperous?

Anybody want to bet on whether Apple will unlock the GSM/GPRS iPhones once they launch 3G devices?

2008 Jan 29 08:50 PM

[David Wolf]

mmii: you're spot on about the Unicom experience. But I suspect we'll be waiting a while for iPhones with CHL embossed on the back.

2008 Jan 29 08:51 PM