Apple's Bipolar China Disorder

Aug.20.08 | About: Apple Inc. (AAPL)

So here is the deal.

Apple (NASDAQ:AAPL) starts selling an album called "Songs for Tibet" on its iTunes Music Store (iTMS), and it does it right in the middle of the Beijing Olympics. Coincidence, or passive-aggressive middle finger to China? Apple isn't saying anything about it, so we are left to reach our own conclusions.

Next, word gets around that a bunch of Olympic athletes staying here in China - reports say as many as 40 - have purchased and downloaded the album.

Yesterday, people around China began noticing that the iTMS is no longer accessible from China. A few of the more tech-minded actually decided to try to use traceroute to figure out why. They confirmed that access to iTMS was being blocked by China.

You mess with the bull...

Without getting into a debate over the politics, let's look at the business issue.

Apple is in the early stages of a much belated (and arguably long-overdue) push into China. After nearly two decades of near-invisibility, the company opened its first Apple store in China just three weeks before the Olympics. A second Beijing store is under construction, and Ron Johnson, Apple's senior vice-president of retail, said there are many more China stores to come.

At the same time, Apple is apparently deep into negotiations with at least one Chinese carrier to start selling a (fully-enabled) iPhone here in China.

And of course, Apple has finally begun making headway in the market against its rival computer, phone, and music player rivals.

By selling "Songs for Tibet," Apple has placed these efforts in jeopardy.

Apple has given the government all the excuse it needs, not only to block the iTunes Music Store, but to raise extra barriers on permits for further Apple retail stores, to throw barriers in the path of Apple's iPhone deals with state-controlled carriers, and to make the creation of a Chinese iTunes Music Store and App Store a distant dream (unless the let the carriers run it.)

Not to mention make the lives of thousands of dedicated Apple customers here in China just a little more miserable - especially those of us who count on iTMS as our sole source of legitimate (non-pirated) music.

And Apple is alienating the very market it is trying to create in all of these efforts, infuriating the legions of Chinese who believe that the situation in Tibet is far more nuanced than the media, activists, and general public outside of China understand.

...you get the horns.

I am sure there were valid marketing considerations behind the decision to sell "Songs for Tibet." I'll even grant the (specious) possibility that there was a good business reason to do so during the Olympics. If not, Apple was certainly within its rights to make a political statement.

But Apple - and its shareholders - must recognize that its own actions are sabotaging its efforts to build a market in China right as those efforts are showing fruit. Such a bi-polar approach to this market is not sustainable. Apple management needs to choose between developing China as a market or the freedom to engage in random acts of passive-aggressive panda-punching.

Making that choice, as much as real estate and labor expenses, is part of the cost of doing business in China.