Dan Butterfield's  Instablog

Let's start with a quote and a cliché …

Quote: "Someone is just makin' this stuff up" ~ Steve Jobs responding to CNBC reporter Jim Goldman’s question about iPhone in China rumors (Jan 15, 2008).

Cliché: Those who know don't talk, and those who talk (blog) don’t know.

There is no shortage of iPhone deal chatter coming from China and I’m doing my best to sort through fact and fiction. But I’m talking here, and it's a safe bet that I don’t know much. In others words, file this post under “speculation.”

Deal highlights:

• 3-year iPhone in China deal
• Target iPhone launch date is sometime in Q4, 2009
• China Unicom (CHU) has pre-purchased an undisclosed quantity of iPhones. Prior rumors put the number at 5 million iPhones for $1.46 billion USD.
• There will be subsidies that will reduce iPhone’s retail price for buyers who go on contract (“post pay” customers).
• There will be multiple plan options with increased iPhone subsidies for buyers who choose expanded (more expensive) plan/service options.
• There will initially be two different iPhone models specially built for the China market, with preloaded apps for Chinese consumers:

1. Model A1324 has received its network access and will be based on the iPhone 3G with 8GB and 16GB choices.
2. Model A1325 is still in the testing/approval pipeline, but should be approved by targeted launch date (Q4). A1325 will be based on iPhone 3GS with 16GB and 32GB choices.

• Probable iPhone distributors include China Unicom's Vsens and major retailers Carrefour(134 superstores in China), Gome and Suning. There were also unconfirmed reports that Best Buy China and Wal-Mart China might sell iPhones. Cybermart was also in the mix, but that report was denied by Foxconn (Cybermart's parent)

Conflicting reports and rumors:

Non-exclusive deal. There were several news services in the US and China that reported the iPhone deal as an “exclusive” for China Unicom. However, the words “exclusive” were conspicuously absent from the August 28th briefing summary posted on China Unicom’s website. There was also no mention of “exclusivity” during China Unicom’s Q2 analysts’ conference where the iPhone deal was announced. By all official communications, the deal is non-exclusive, leaving Apple free to negotiate with other China carriers, most notably with China Mobile (CHL).

Sorting out the “no-WiFi” reports. Without going down a deep rabbit-hole (explanation of WAPI vs WiFi), suffice to say that the first iPhone "approved" for China (Model A1324) will not include WiFi. This model may, however, include China’s alternative to WiFi, otherwise known as WLAN authentication and privacy infrastructure (WAPI). The second iPhone for China (Model A1325 - based on iPhone 3GS) is a more interesting case. This iPhone was submitted to China's CTTL for mandatory testing in July. There have been conflicting reports on the “WiFi” status of this second iPhone. Since WAPI is sometimes called "China's WiFi," it’s easy to see how reports might get garbled; even more so when English/Mandarin language translations are involved.

Okay, let’s try to sort this out … One series of reports from China tech sites/blogs has quoted “inside sources” who claim that iPhone Model A1325 will include WAPI/WiFi in combination. This would not be far fetched, as this WAPI/WiFi stack was recently authorized (May of 2009) by China’s Ministry of Industry and Information Technology (MIIT). Prior to May 2009, WiFi was expressly forbidden on mobile phones. Chinese Netizens have largely ignored this ban as WiFi base-stations cover many urban zones and grey-market ("back of the shop") WiFi-capable handsets are everywhere. The WiFi ban on officially sanctioned phones has only added fuel to the flourishing grey-market. Consequently, the MIIT felt compelled to throw WiFi a bone by allowing WAPI and WiFi to be stacked together on handsets. This King Solomon’s compromise allows both sides to win. China gets their WAPI standard (and royalty payments) and consumers can get WiFi.

All that said … There have been reports proclaiming loudly that WiFi will not be on iPhone and still other rumors which say yes Model A1325 will include the WAPI/WiFi combo. Bottom line ... there is still no clarity on this story. Time will tell.

Control of the wireless value-added services (WVAS) platform. For more than a year now, China's telecom industry has been “circling the wagons” to defend against the new breed of "smartphone" manufacturers who would be so bold as to take a share of carriers’ WVAS revenues. China’s MIIT has no doubt been a champion of this "keep revenues in house" campaign. And it's no coincidence that the “no revenue sharing" mantra has been inserted into virtually every "China telecom source" leak to the media related to the iPhone in China negotiations.

meteor changed dinosaurs' world

Apple’s (AAPL) successful platform (iTunes, App Store, MobileMe) has clearly been a concern for China’s telecom industry. They recognize that carriers will either need to come up with compelling platforms of their own (that integrate seamlessly with smartphones) or they stand to lose WVAS revenues to smartphone manufacturers who are attempting to meet, match, mirror, model Apple’s eco-system.

China Unicom and China Mobile are both developing their own proprietary Android-based mobile operating systems and they are also working with numerous handset manufacturers to build their own customized Android-based smartphones (OPhones for China Mobile and UPhones for China Unicom). These OPhones/UPhones are designed to promote the carriers' own WVAS. Why are the carriers doing this?

1. Control the customer ("hooks" via customers' dependence on services)
2. Maximize WVAS revenues and generate higher average revenue per user (ARPU)
3. Preempt their greatest fear - becoming "dumb pipes" ... The meteor is to the dinosaur as the smartphone/platform is to a "dumb pipe" carrier

Welcome to the "wild rumors" portion of the show. There have been several reports in the China tech press which claim that China Unicom will use their own platform to support music and apps on iPhone. You heard right ... IF true, that means no iTunes and no Apple App Store on the iPhones for China Unicom. Since seamless iPhone/platform integration is critical, Apple might be wary of users plugging iPhones (requiring new software) into a "carrier-built" platform. I have serious doubts about this "carrier built" rumor. A less kluge option would be for Apple to "help out" by creating a cloned version of iTunes/App Store that can be rebranded for China Unicom. The greatest complexity might be integrating iPhone with China Unicom’s billing systems and developing alternative ways for users to pay for music/apps (the majority of consumers in China do not own a credit card, which is required on iTunes).

Rebranding iTunes/App Store and/or integrating iPhone with a carrier's platform, is notsomething Apple would do without careful consideration and substantial compensation.

This brings up an intriguing sidebar … The initial rumors of the iPhone pre-sale to China Unicom leaked in mid-August. The deal reportedly involved a sale of 5 million iPhones for $1.46 billionUSD. Now follow me on this one … Apple normally provides software updates to iPhone users at no cost (free). Due to accounting rules related to these “free” updates, Apple recognizes revenues from iPhone sales over a 2-year period. However, the ceding of ownership/control to a China Unicom version of iTunes might also contractually redefine who (Apple or China Unicom?) is responsible for delivering software updates to iPhone owners. IF, IF, IF (can you tell I want to qualify this) China Unicom is the party legally/technically responsible for delivering iPhone software updates, then Apple might be able to immediately (not over 2-years) recognize the revenues from their iPhone presale to China Unicom. IF the quantity/price presale rumors are true, this would be a nice $1.46 billion add to revenue in the next quarter for Apple (AAPL). That said, as a wise friend admonished when I floated this notion, “I doubt anyone outside of Apple and China Unicom knows the specifics of the deal, and we can be sure that no one in the know is talking about those specifics right now.”

Disclosure: Long AAPL

August 11, 2009: China Business News reports that China Unicom (CHU) has agreed to pre-purchase 5,000,000 iPhones from Apple (AAPL) for a cool $1.46 billion USD. This news breaks at a signing ceremony between China Unicom and Carrefour, one of several mobile phone distribution partners for China Unicom. The executives who spilled the beans are identified by name and are associated with Guangdong Unicom, a subsidiary of China Unicom.

August 12, 2009: China Unicom and Apple both deny the $1.46 billion presale rumor as "no iPhone deal has yet been concluded."

August 14, 2009: Zhou Fang, the CBN reporter who broke the original 5-million iPhone presale story adamantly sticks to his report, and to back up his case, reveals that he made audio recordings of his interviews with the talkative Guangdong Unicom execs.

August 14, 2009: Chongqing Evening News, quoting an unnamed Carrefour employee, states that the iPhone in China deal is indeed a “go” and Carrefour would be part of the iPhone distribution plan. The Carrefour employee further reports that stores in Guangzhou and other costal areas have begun preparing iPhone store displays.

August 14, 2009: DoNews in China, citing “unnamed sources,” claims that China Unicom’s handset distribution division,Vsens, intends to have multiple iPhone distribution partners including Carrefour, Gome and Suning.

Hey, what about Best Buy China and Wal-Mart China?

August 19, 2009: Quoting an industry source, Interfax TMT reports that China’s Ministry of Industry and Information Technology (MIIT) will soon grant iPhone its long awaited Network Access License (NAL). The NAL is a gating factor to any deal announcement.

Wang Jianzhou

August 20, 2009: Facing the financial press after a somewhat disappointing quarterly earnings report, China Mobile (CHL) CEO, Wang Jianzhou states that China Mobile is still engaged in discussions with Apple over a possible iPhone deal.

August 21, 2009: A China Mobile spokesperson reaches out to Interfax TMT and modifies (ahem, refutes) the words of his own CEO … According to the media relations rep, talks between Apple and China Mobile “have been over for two months.”

Don't know about you, but I'd believe the CEO versus a PR spinmeister. Perhaps there will soon be two China carrier deals to announce? > More

August 21, 2009: China Business News quotes a Foxconn source who claims that an iPhone for China (presumably Model A1324 without WiFi) will be ready by September.

The much bigger news from the Foxconn source was the claim that Apple is now developing a second iPhone for China (presumably Model A1325 with WAPI/WiFi*). This second WiFi-enabled model for China could be ready for launch by yearend.
Image from - Ministry of National Radio Authority www.srrc.org.cn/

Note: Adding credence to this story, a second anonymous source, from China Telecommunication Technology Labs (CTTL), backs up the dual WAPI/WiFi iPhone model claim > More

August 23, 2009: labs.chinamobile.com (an affiliate of China Mobile) reports that a formal agreement between Apple and China Unicom was reached (signed contracts?) on August 17, 2009.

Come on China Mobile, please share a few more juicy tidbits about those supposed talks that you're "not having" with Apple.

There you have it … You’re now up to date on the last few episodes of “As the iPhone Turns."

Still confused? Don’t fret … This soap opera actually does make sense once you understand the layered plot and actors' motivations.

* More background on > WAPI/WiFi