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.
89 responses to “Why Apple Should Tell China Mobile to $#@! Off”
Actually, as a Chinese I know a lot of Chinese even don’t download apps for their iPhone. They just use iPhone to make phone calls and sent txt messages. So there is no need for 3G network. Ridiculous, huh? Anyway, iPhone is more than a Phone right now. It’s kinda fashion.
I am in the UK. I use 2G to make phone calls, primarily overseas, so I am on Lebara. I have fast WiFi at home and at work. I don’t NEED 3G!
Still, I think at the least that comparisons between China Mobile and China Unicom for 3G customers is more telling about iPhone’s potential customers than counting up and comparing 2G users.
Classy headline there guys.
Right from day one, Apple positioned the iPhone to be the game-changing product, the one that turned the carriers into dumb pipes. E.g. why no MMS at the start? Use email, it’s more flexible and free. And it keeps revenue away from the carriers. You want carrier skins? Get lost. Pre-loaded carrier apps? Get lost. Carrier logo instead of Apple logo? Get lost. Carrier ringtones? Nope, use iTunes or roll your own. There are many examples, but the latest (and strongest) one has to be iMessage, the ultimate bird flip to carriers as it obsoletes SMS; a stake in the heart of the most profitable product that they have.
If this is Apple’s mindset, there is no way they will cave into China Mobile’s demands.
“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”, are you retarded? Apple isn’t motorolla, we will never see an iOS clamshell device and they will not release smaller iPads or an iPhone nano, you clearly have no real insight into the future the company foresees itself in.
China Mobile=Chinese Government=Chicom MIlitary
That alone should stop the negotiations.
If they would make a special iPhone just for China Mobile, than not why for T-Mobile here in the states? Apple would hit us up here back home first if anything.
Wow – for once I agree with you Mike, Apple shouldn’t cave in. As a side note, there is one caveat to the Chinese mobile market that could more rapidly propel Apple sales to China Mobile competitor’s, and that is if China would institute number portability. Many of those that I speak with that want an iPhone but are on China Mobile don’t buy one because they don’t want to deal with the hassle of changing phone numbers and reconnecting with all their contacts.
I agree with your point as well Mike. I just want to say that there should be a correction to this article. The iPhone isn’t even out yet in China, as you should know. The queue you are talking about is in Hong Kong, which is a ‘special administrative region’ of China with totally different carriers. As a matter of fact, we are separate from them. Just wanted to let you know as it seemed a bit confusing.
I agree with you on all expect the smaller iPad, I would look for them to do a 7-8in one in the next few years. Steve isn’t there to stop it and if the people want it Tim Cook might actually give them it. But a clam shell would be stupid for so many reasons.
@germo. That is not true. Have you seen the prices of iPhones sold on Taobao? There are many people in China willing to pay a thousand more yuan for an iPhone 4S. Hong Kong’s cellphone users pale by comparison to Shanghai or Beijing. Almost all iPhone 4S sold on Taobao and in the black market in China actually comes from Hong Kong and Singapore. I bought three for my colleagues in Shanghai from Singapore. Many Hong Kongers are also making big bucks selling iPhones through Taobao.
T-Mobile is nothing compared to the Chinese market. China has close to 700 million cellphone user. That is more than two times the whole of America’s population.
Fuck China Mobile…….I must have changed phone numbers about 5 times since I’ve been in China. Without fail, I have received daily spam, multiple times a day, on each and every single one of these phone numbers. So yeah, fuck China Mobile.
You don’t have to fuck China Mobile if you can afford roaming from your homeland.
You are laughable if you compare China Mobile to AT&T.
I’m not convinced T-mobile really even wants the iPhone. The less viable the carrier looks long term, the more likely the DoJ will OK the AT&T deal. No clear outline to LTE and no iPhone have meant a steady exodus.
If all goes according to plan, by this time next year, Deutsche Telekom will have unloaded T-Mobile USA for a pretty sum and T-mobile customers will have access to both AT&T’s LTE and iPhone anyway. I’m sure the new “AT&T-mobile” will make quick work of forcing the one million plus iPhone users on the current T-Mobile network over to the more expensive AT&T iPhone specific plans with Apple revenue sharing. It will be a win-win for everyone but consumers.
So no. Apple won’t ever enable AWS-1 bands in the newly capable 4S hardware. :-(
With lots of due respect, I think there’s a broader point that you’re missing in your analysis.
The clear trend in mobile is cutting out the operators. Mobile VoIP cuts out call revenue. Mobile video calling cuts out 3G video calls before they ever take off. WiFi hotspots cut off 3G bandwidth. 3rd party apps cut the need for operator apps and services. The writing is on the wall that operators are moving towards being pipe (bandwidth) providers. It’s the same as the ISP trend from 15-20 years ago.
In order for operators to keep doing well enough to invest in infrastructure and maintain coverage, and for that matter to subsidize phones so that noone has to pay manufacturer cost, there will sooner or later need to be business models in place that gives them a share of revenue from the new age of mobile ecosystems. They bring the customers, they subsidize the phones, they put in the needed infrastructure, they’re a player in the game.
This is not unlike the way that fees for long distance and international calls are automatically split among all the carriers that carry a call from start to destination. We don’t see it, but your few cents a minute gets divided up among all the carriers that provide part of the route your calls need. The same is true of all industries.
Apple’s succeeded in some radical deals with operators and others. And they may continue. But the industry is going to need at some point to move to revenue sharing among all the players.
They DO get a cut of app revenue. Users have to pay data fees when they download apps.
I know thiis has nothing to do with the point you were trying to make, but just wanted to correct one little mistake in your article. Even though the iPhone 4 is not compatible with the China Mobile’s 3G network (Which uses the china developed td-scdma), it still works with the Edge 2G network. For me, the 2G network is fast enough for me to check my mail, do a little browsing, and even fast enough for me to use Viber to make free VoIP calls while I am away from the office or home where I can connect to wifi.
Not If the user downloads apps only while they are on wifi. But if they get Apple to agree, they would get a cut of the revenue regardless of how they download the app. They realize that since these devices are wifi-enabled, they will lose a lot of revenue from users avoiding high data fees by using wifi whenever possible. This was why when the iPhone 3G or 3GS was first released in China, the carrier had apple disable wifi on the units.
Isn’t this also about control? I mean, if China Telecom wants a share, then their next step is to conceivable try to control some of the app market, censoring some apps (remember this is a state where businesses are run through the state, rather than by private companies. You can be sure that if China Telecom wants something, then they can easily force a change in the law, as the state and the business are not independent of each other – and if that happens, Apple would have no choice except to bow down to them. Or exit the market… ) – as they did with Google China and the net. Surely that is the bigger question here?
On the other hand, all citizens of all states should have the same access to the same “services”, no matter whether it is an iPhone or a dumb phone, and no matter whether it is 2G or 3G or even 4G capable. It is by putting new technology in the hands ot the neediest that technology can advance, not by keeping it alone for the wealthiest few. If you keep it for the wealthiest only, that is a smaller pie to take profit from. If you make it available to all markets, the pie grows (through extra sales even with a reduced margin) and thus the money to invest in future technology grows too. China Mobile, like Apple, knows that it is in their interest to carry the iPhone, after all this would likely reduce some of the vast quantities of knock offs – and it puts money into China’s economy rather than having this money go straight to the counterfeiters.
china = world domination in a good way! I am so glad the US era is ended, with very deep pocket of real cash and the single largest consumer market in the world, Yes, chinese company can do what they want. you either agree to make money together or fuck off and don’t border with the market! no one asked apple or anyone else to go China, if you do, respect the market and the country. To Start with respect to the government!
They’ve done it before.
Everything Chinese should be told to $#@! Off.
More than one in five Chinese say the want a Mac as their preferred PC.
*clap clap clap*
r u sure?
How would it even work anyway? You could argue that CM might get a % of revenue from any app downloaded by its customers, certainly not from any app downloaded worldwide on any iOS device. So where would that % come from? As 70% goes to the developer and that isn’t going to change (that would be a total PR nightmare for Apple), the money would have to come from Apple’s cut. As they run the app store as a break-even service, the percentage that they could give to CM without running the app store at a loss would be tiny. That’s what I just don’t get about this whole situation: how would CM make significant money from a small cut in app store revenue?!
!
The economics just don’t add up. Apple recently announced they have paid out $2.5 billion to developers, which when you add on Apple’s 30% cut is about $3.25 billion – that’s the total revenue the app store has generated since its launch. And if you said that China Mobile was to get a 5% cut of all of that, which is for every single app since the app store launched, they would get $162.5 million. I just don’t see how that is worthwhile to either Apple or China Mobile. If they are after a cut of the Apple pie, wouldn’t they be better off going after iPhone hardware profits?
Excellent article and impeccable logic!
Ron
RonSeman.Com
I agree wih the majority of this article except for iOS devices in a clamshell form !? I never see them doing that. For a company so focused on design why on earth would they design a clamshell device. I can’t even remember the last time I saw a clamshell phone. No one uses then anymore, at least in Europe.
I agree with the clamshell being a big NO WAY, but I don’t necessarily feel that way about a smaller iPad. There was a time, I recall, when Steve thought the idea of video on an iPod was ridiculous given the small size. There was also a time when he suggested we should be content with web-only apps. If there is enough of a demand, it will come.
i’m pretty sure Apple has been telling ChinaMobile to shod off for 3 years.
Or else they would have cut a deal by now.
Apple has the golden goose (iPhone) while ChinaMobile owns the turf.
But here’s the catch. iPhone’s dominance is not guranteed in this ever changing tech-landscape, while ChinaMobile is owned by the China government and will continue to own the ground for the foreseeable future. Thus basically ChinaMobile is trying to beat Apple with the waiting game. But if Apple hasn’t been as stout, they would have already cave in and bow down to them.
So hats off to Apple for holding it out so long against this greedy company!
i’m pretty sure Apple has been telling ChinaMobile to shod off for 3 years.
Or else they would have cut a deal by now.
Apple has the golden goose (iPhone) while ChinaMobile owns the turf.
But here’s the catch. iPhone’s dominance is not guranteed in this ever changing tech-landscape, while ChinaMobile is owned by the China government and will continue to own the ground for the foreseeable future. Thus basically ChinaMobile is trying to beat Apple with the waiting game. But if Apple hasn’t been as stout, they would have already cave in and bow down to them.
So hats off to Apple for holding it out so long against this greedy company!
Apple will never make a clamshell phone! Why? whats the point. also there most likely wont be another form factor iPad e.g 7″ as it would fragment the ecosystem.
only if the Chinese government respects their people first
Yeap, better to keep the 1%. :D
Apple’s biggest obstacle to increasing market share is still production capacity. They’re limited by the availability of displays and memory chips, not by any shortage of customers or carriers. If China mobile doesn’t want to cut a deal, they don’t have to, but it’s not like Apple needs them.
Japan conquered china before.. so maybe apple can. 700 million people, that’s not something to hiss your teeth at.
How about respect for the citizens and their demands to be treated like humans?
China is all about control. Look what they did to Google, Yahoo!, Twitter, and others. These companies bent backwards to enter Chinese market and lost out in the long-term. Someone needs to tell Chinese companies that if you don’t play fair, we won’t play at all. My respect for Apple has gone up for being the company to stand up against Chinese bullies.
Despite VoIP calls, mobile video, WiFi hotspots, and 3rd party apps… every single smartphone has a minute plan and a data plan. Both of these plans directly translate into revenue for the telecom.
Telecom want to make money on apps they did not build, did not store/market, or sell! They just want a free lunch? Sorry, the era of free lunches is over. They cannot have revenue share for not doing anything, beside lending us their pipes (for which we have paid as part of data plan). If they want more revenue out of the ecosystem, they have to contribute more to the ecosystem than just dumb pipes.
No government is owed the people’s respect. All it is owed is our scrutiny. That is the nature and function of all governance. China is an “emerging” democracy. Instead of revolution, it has chosen a path of evolution. It’s both frustrating and fascinating to witness.
What makes China great isn’t its government but its people. For thousands of years, the people of China have lead the world in technological innovation, in philosophical discovery, and in artistic expression of every kind. It may have slumbered the last century or so but it has reawakened on a spectacular scale. I’m excited to think what the 21st century has in store for its people and the world. These really are exciting times!
As an American, I am not particularly thrilled to see the ending of our economic dominance but change is the way of the world, is it not? I look at the transitional successes of other Imperial powers like Europe and take heart. The “good” times are not necessarily behind us. Opportunity and prosperity are renewable resources in a world economy.
Revenue sharing? What on earth are you talking about? They’re a utility! Does my power company get a share of my electronic appliance manufacturer’s revenue? Of course not. They make their money by selling me electricity. Carriers make their money by selling me network access.
And don’t kid yourself. Those “subsidized” phones aren’t a gift. They’re financing your handset and it costs you dearly. It’s driving up the price of both handsets AND service! It’s outrageous to anyone who has a command of basic mathematics.
Like so many industries before them, carriers fail to see their universe has changed with the arrival of the internet. They aren’t becoming a utility. They ARE a utility. They may not like it. They may even fight it. But consumer expectation has changed. They will either adapt or be swept aside when those who choose to meet that expectation come along and steal their revenue base.
They just need to end this game and charge by the byte. Talk, data, text… who are they kidding? It’s all data from a network perspective.
Several inaccuracies in this article.
1.) iPhone 4s is not officially available in China. The massive queues mentioned are a reference to hong kong.
2.) china mobile customers using the iPhone are not restricted to wifi for data. China mobile has GPRS and EDGE. There already is a China Mobile compatible iPhone, just not on 3G.
Not to mention that this would also set the precedent for other carriers to then negotiate their own cut of app revenues, thus increasing the prices of apps and/or cutting the developer’s share since Apple isn’t likely to give up its own portion.
Like your commentary!
China Mobile or China Unicom? Both scuks! Using iPhone in China is a disaster!