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Could China Be Moving Toward A Two Tiered Internet?

|Includes:Apple Inc. (AAPL)

The Government of China has always wanted unfettered internet access for it's business and ruling class while maintaining control over usage and information available to the public at large. How this might be achieved.

Android OS has one potentially enormous problem that Apple's iOS has managed to avoid. A problem that Google has been wrestling with since January 2006 when Google was forced to acknowledge, to it's scorn and embarrassment, that it was aiding the Chinese Government in developing the "Golden Shield Project", more commonly know as, "The Great Firewall of China". The project involved filtering certain keywords provided to Google by the government of China: restrictions applied to thousands of terms and websites. Google used Shanghai as their experimental city where they used algorithms to block general content such as pornography, terrorist websites and so on. One rather humorous consequence that occurred time and again was, that in Google's success, they would end out blocking content that some person with political power desired. That person would then request that the block be removed and, often enough, it would be. It was hard for those in power to accept the fact that they couldn't have their own internet network, while blocking the network of others.

Again China is wrestling with Google, this time it is over Android OS. As the problem was stated in an Article from The Economist Magazine, titled, "Taking A Bite Out Of Apple", "…the Chinese government requires handsets to run a neutered version of the Android operating system, without Google's app store, mail service, maps, and other features.". It seems that Apple has avoided such controls and omissions to it's iOS. This is probably thanks to Tim Cook and his willingness to defend the integrity of iOS against the blind desire of the Chinese Government to Control information. Or could there be another reason that the Chinese Officials are keeping their hands off iOS?

Whether by design or by organic forces, an unforeseen consequence may arise in China. It is possible Apple's iOS, will behave as it does in any country, while android and other OSs will be subject to Government controls and will therefore be degraded in their performance. The gap in performance and available content between iOS and other OSs could increasingly diverge until a two tiered internet system emerged. One system, the global internet, only accessible through the iPhone. A second system, a Government controlled internet which would be subject to the whims of the Chinese government as it controls and manipulates aspects of it's usage.

An article from Reuters published on October 1st, 2013 entitled, "China threatens closure of mobile news apps amid Internet crackdown", has made it clear that the point of intervention where the government will censor and control information flow on mobile devises is news apps and other information gathering apps. The article begins:" China on Monday launched a crackdown on several mobile news applications that provide news information services without approval from government regulators, threatening to shut down those who refuse to "rectify""…… Two specific Apps were mentioned…. "Mobile news applications identified include Zaker, which said it had more than 17.5 million users at the end of April, and Chouti whose slogan is: "Publish all that should not be published.". "Zaker" is a news app available at iTunes for iOS. "Chouti" is an Android App so it's distribution is probably available from multiple points. Back to the desire of the Chinese wealthy to have their own internet system. All it would take to keep Zaker, (iOS), unfettered from government controls would be a quiet request from a high official to leave Zaker alone. Such a request may not be necessary. Again from the article: "China's top court and prosecutor issued a regulation in September specifying that people will be charged with defamation if online rumors they create were visited by 5,000 internet users or reposted more than 500 times. Those responsible can be sentenced to three years in jail." This edict clearly suggests that punishment for disseminating undesired internet news is based on the quantity of traffic around that news. Since there are more Android users, than iOS users, android news bloggers are more susceptible to imprisonment than iOS bloggers for disseminating news.

The situation in China in regards to internet censoring is very fluid and changing rapidly. Since writing this article another iPhone App, "Open Door", has stopped being sold at iTunes China. That doesn't mean that the App does not function in China. Also of note there is an upgrade available for "Zaker" for my iPhone. The notice description were presented on my iPhone were in Chinese and English. This could indicate that "Zaker" is available at iTunes China. Did Apple rescind it's ban on the sale of Zaker based on pressure from Chinese officials who needed their Global internet connectivity reestablished?

It is hard to discern how much intention would be needed for a two tiered internet to emerge in China but there are reasons why it would work out very well for the Chinese government if it occurred. For one, the high prices of iPhones dictates that only the upper class would have access to the unfettered Global internet. Eligibility would not need to be dictated or granted by decree; actions that would make the government's dictatorial aspirations transparent. Only the marketplace would be needed to select those 'worthy' of the upper tier's use. Also, the Chinese Rulers do not want business owners, entrepreneurs, bankers, and of coarse, themselves, to have their internet access suppressed or impaired in any way. There is too much at risk in terms of lost communication and information on which global commerce and therefore China's, success, depends. At the same time the Government would be able to control Android and other OSs with impunity, provided others in power weren't complaining about it. If they all owned iPhones, it is likely that none of them would.

The consequences for Apple are obvious. The iPhone, would become the only phone that is used by the wealthy in China; not because it is a better phone than any phone one might want to compare it to, but because it would be the key that unlocks the Global internet. This would make the iPhone the one and only aspirational phone in China. Every upwardly mobile citizen would desire to join this exclusive internet club. Once in place, this paradigm would hold as long as the Chinese Government exercised their control of the internet. Once they have their two tiered system in place I can't imagine them ever wanting to give up both the freedom it provides for them and the control it provides over the masses.

It is possible that the transition to a two tiered internet system in China is already occurring and a rapid paradigm shift is imminent.

If all of this comes to pass I doubt that the powers that be in China will want to see a change in the pricing and margins of the iPhone. If anything they will insist on even higher prices or will impose special taxes on iOS devises. Apple's large profit margins will be the price of a ticket, in China, to the Global Internet Show.

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Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Stocks: AAPL