Fragmentary and occasional reports suggest that Apple has been negotiating with China Mobile for three years without reaching a deal over official support for iPhones on the carrier’s network.
The sticking point: China Mobile wants a percentage of app revenue.
Many US pundits have written that Apple should bend over and do whatever China Mobile wants. Why? Because China Mobile is so ginormous that Apple could make a killing from all those new customers, even if it shared app revenue.
I think they’re flat-out wrong. Apple should hold firm, and refuse to make an exception for China Mobile. Here’s why.
China Mobile is the world’s largest mobile carrier, with some 628 million customers and 70 percent of the Chinese market. Apple currently partners with competitor China Unicom, which enjoys only 20 percent market share.
Given its dominance, partnering with China Mobile seems like a no-brainer, even if it means sharing app revenue. However, market share numbers alone fail to account for the reality behind those numbers.
China Mobile is owned by the Chinese government. It’s like the Chinese cell phone equivalent of the US Postal Service in that they have a commitment to provide service to China’s remotest, most rural and far-flung communities.
The vast majority of China Mobile’s customers would never buy an iPhone. Most are using cheap, no-name phones that use 2G data connections. iPhone buyers, on the other hand, are wealthy urban hipster types, for the most part.
China Mobile, for example, has only 43 million 3G users. Compare that with China Unicom’s 30 million 3G users, and you can see that China Mobile isn’t all that much bigger for the kinds of customers who would buy iPhones.
Even AT&T in the United States has vastly more 3G subscribers than China Mobile.
In other words, don’t be dazzled by the number of total China Mobile subscribers. Only a small percentage of them are potential Apple customers.
Also: Giving in to China Mobile’s demands makes sense only if you think small — the iPhone, China and now.
The big picture is about more than the iPhone, more than China and more than just right now. And if nothing else, Apple is a big-picture company.
The iOS app store concept is broadening and moving up the food chain, first to iPad and then to Mac OS X. In the future, I would expect other devices not only with App Stores, but also running iOS with app stores. I think we’ll soon see iPads of various sizes (and with data connections and sold by carriers). We’ll could see iOS-based clamshell devices. And we’ll almost certainly see iOS-based desktop systems.
Setting a precedent in China for sharing app revenue would be a lousy move by Apple. While hardware sales will fluctuate wildly, content sales, including apps, will prove much more reliable sources of revenue for Apple.
More importantly, I think Apple has the stronger negotiating position, simply because of the crazy and growing popularity of Apple in China.
Steve Jobs is a legend in China — far more popular than anyone in the Chinese government or China Mobile.
Apple is by far the most desired brand in China. Apple’s annual sales in China rose from $3 billion last year to $13 billion this year.
More than one in five Chinese say the want a Mac as their preferred PC.
The line for the iPhone 4s in China looked like they were giving away free diamonds, even though there’s no Chinese-language version of Siri.
As Apple’s popularity grows and grows in China, China Mobile doesn’t want to be the only major carrier without an official partnership to sell Apple devices.
Apple’s popularity is so great in China, I think, that Apple is in the position to play king-maker among China Mobile’s competitors. China Mobile is at risk of losing high-end market share to China Unicom, and any other carrier Apple chooses to crown.
There are already some 10 million iPhones on China Mobile. This is especially impressive when you consider that the iPhone can’t even use the carrier’s TD-SCDMA 3G data technology. These users are connecting to the Internet via Wi-Fi only. That’s how badly some China Mobile customers want iPhones: They’d rather have an iPhone without mobile broadband than a non-iPhone with.
The give-em-what-they-want pundits say that the 10 million iPhone users already on the network demonstrates that the carrier doesn’t need Apple. I think the reverse is true: It demonstrates that Apple doesn’t need a contract with China Mobile.
In fact, the carrier is desperate to win iPhone users to the network, advertising the iPhone on billboards (even though they don’t sell it) and even offering Wi-Fi cards to those who sign up using an iPhone.
If China Mobile holds firm and refuses to drop its demand for a share in app revenue, Apple should do one of three things:
- Go ahead and make iPhones that are compatible with China Mobile’s network, but sell them at Apple stores unlocked instead of through China Mobile.
- Don’t sell a China Mobile-compatible phone, and instead draw iPhone fans to alternative carriers.
- Do both — sell China Mobile-compatible phones at high prices and work with alternative carriers to bring down the costs for the approved carriers.
I think the worst thing Apple could do is cave.
The potential market-share gains are not as great as they seem. And the potential downside globally, across Apple product lines and for years into the future just aren’t worth it.
