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Update: See > Apple and China Mobile to build a TD iPhone 3G? for more details and speculation over a possible TD-SCDMA iPhone 3G – See also the latter half of this post (below) for a TD iPhone scenario.

The Real iPhone Games begin … a deal in the works with China Mobile

Reuters and several news services are reporting today - Friday June 26, 2008 – on statements released by China Mobile that signal an iPhone deal may be near.  Quoting China Mobile’s spokeswoman Rainie Lei, Reuters reports that talks to bring Apple’s iPhone to Mainland China have cleared their biggest hurdle and are now focusing on practical issues. 

“Apple is no longer insisting on a revenue-sharing policy, so the biggest hurdle for China Mobile to bring in the iPhone has been cleared, but there are practical issues still to be resolved.”

Rainie Lei further explained that the reason for progress in negotiations was Apple’s change in business model.  Specifically Apple’s decision to move away from contracts that require carriers to pay Apple a portion of the iPhone owner’s carrier subscription fees.

Goa Songge, Deputy Director of China Mobile’s General Department (China Mobile’s senior communications officer) noted that China Mobile would not marry the company to a specific release date.  Although he added a comment making it clear that substantive talks are in progress:

“We’ve broken through the biggest obstacle and we are negotiating at the working level.”

More via > Fortune’s Apple 2.0

See also > arstechnica 

iPhonAsia Comment:

A deal with China Mobile may be concluded in relatively short order.  The most probable timeframe for an announcement is the fast approaching Olympic Games.  This timeline will also coincide with the grand opening of Apple’s new flagship store in the Sanlitun region of Beijing, China.  There will be plenty of fanfare in China surrounding the Olympic Games and this would be an ideal venue and time to officially launch iPhone in Mainland China. 

It is hard to overstate how important the Olympics are to China. Nothing is being left to chance including telecommunications. The Summer Games will be a coming out party for China and an iPhone deal will be an opportunity to showcase the cooperation between two important companies on a world stage.  The games also provide an opportunity to develop new marketing campaigns and I expect Apple and China Mobile to offer up some cool Olympic themed ads.

A few sidebar comments over the now confirmed “break through, working level” negotiations between Apple and China Mobile …

I have read on various blogs that China Mobile’s current lack of W-CDMA G3 (no license or network), will necessitate that Apple provide China Mobile with a gen-one (non-3G) version of iPhone. I believe this is a dubious notion although I would invite reader comments on this topic.  Why is this doubtful?  The next generation iPhone 3G will include a chipset that will be backward compatible with China Mobile existing GRPS/EDGE 2.5 G networks. Hence, there should be no need to deliver China Mobile a production run of the gen-one model. Moreover, I expect that Chinese consumers would strongly prefer the latest generation iPhone 3G model notwithstanding China’s current lack of 3G.

Let me partially correct the previous paragraph by stating that China does currently have a 3G network in the form of Time Division Synchronous Code Division Multiple Access (TD-SCDMA).  Yet frequent readers of iPhonAsia know that I have doubts about the long-term viability of TD-SCDMA. China’s home-built 3G network has yet to be launched and China Mobile and numerous contractors are working furiously to ready TD-SCDMA. Official launch is slated for the the Beijing Summer Olympics in August. China Mobile now has 14,600 TD-SCDMA towers throughout ten major cities and they have substantially upped their terminal (cell phones) orders to 300,000 units in time for the Olympics. 

Whether TD-SCDMA manages to survive and thrive is a debate for another day and post. What’s important to consider here/now is how China Mobile and Apple might address the “3G problem.”  The problem being that Chinese wireless users won’t be able to take full advantage of iPhone 3G’s faster data download speeds. China Mobile would like to showcase the China Multimedia Mobile Broadcasting (CMMB) standard (Olympics and other television broadcasts via a mobile handset) and their value added services (Monternet platform), and yet the only 3G available (for now) is the nascent and bug-plagued TD-SCDMA. To date, China Mobile has sold only 3,000 TD-SCDMA handsets despite a generous subsidy. 

Will the newly unveiled next-gen iPhone 3G support China’s TD-SCDMA?  Highly unlikely! “TD” is far from a proven world standard 3G protocol and Apple would take a huge risk + added expense to build TD-SCDMA support into their iPhone chipset. Moreover, an iPhone deal would have to have been cemented long ago with China Mobile for Apple to have committed to the “China built” TD-SCDMA.  Bottom line … there will be no TD-SCDMA support in iPhone unless… Yes there is one “unless” although it is a long shot scenario … in Vegas odds 10 to 1 against.  Just for fun, here’s how it might play out …

China Mobile: un-redacted minutes from a hypothetical internal executive briefing -“#$@!#!.  Wang Jianzhou (China Mobile CEO) just got called into an emergency meeting with Li Yizhong (Minister of Information & Industry) and they’re both pissed! Li just got yelled at by Mu Hong (Deputy Director of the National Development and Reform Commission).  

He said they want everything and I mean EVERYTHING running perfectly during the Olympics. Just our luck … One of the NDRC officials dropped into the TD-SCDMA counter at a China Mobile Service Center. He said there were no customers looking at TD-SCDMA phones. None! And when he asked about a “TD” handset, our sales staff discouraged him from buying one! His reaction “WT#@!%$!”  

We’re in trouble!  The Cabinet are not all on the same page. We have an agreement with the State Council and SASAC to move aggressively on development of long-term evolution (LTE) 4G. We know that TD-SCDMA is a pig and we’ll phase it out by 2010.  The good news is that we can use some of the TD infrastructure to build-out a world standard time-division duplex (TDD) flavor of LTE (dubbed TD-LTE by the Chinese). This is the “natural” upgrade to TD-SCDMA. SASAC has given us the green light to move on TD-LTE. We’ve already spent CNY15 billion (USD $2.2 billion) on TD-SCDMA and we are not going to pour any more money down that hole. But the NDRC is adamant that TD-SCDMA succeed and many in the MII and State Council agree with the NDRC.  Not everyone in the ministries read the our TD-LTE memo. And now it looks like we will not get any 3G (other than TD) or 4G license until we make TD-SCDMA a rousing success. #$%@! If no one is buying the TD handsets, we’re not going to get anywhere! How can we quickly jump-start interest in TD handsets?!

Call Apple …Tell them we want a special iPhone 3G production run with a chipset that supports TD-SCDMA and CMMB. Tell them we’ll take serious quantity and subsidize the heck out of the retail price and give them a nice cut up-front. But no revenue sharing! 

If we can’t make TD fast or reliable, at least we can make it fun with iPhone 3G. And they’ll use our Monternet platform. 

Apple wants a deal. They’ve been respectful, very discreet, and never played the press over negotiations. Apple has also kept their word to negotiate with us exclusively as long as we continue talks in good faith. But time is short and if we don’t get serious with Apple they will engage with China Unicom.

We need iPhone and we can’t let China Unicom steal it along with a W-CDMA 3G license … just don’t say that publicly.

Okay… Call Apple. Tell them we’re ready to get serious. If they won’t go for a special TD chipset production run of iPhone, we’ll still take the standard iPhone 2.0 model.”

Again the preceding was “for fun” pure speculation and almost assuredly way off base… except for the “we’ll take the standard iPhone 2.0 3G model” part.

While many of the issues dramatized via my hypothetical executive briefing are real, the more probable scenario is that the State Council and Ministries have agreed to officially launch TD-SCDMA in late July and do everything possible to make it a success during the high profile Olympic Games. Thereafter, massive expenditures on TD-SCDMA will phase down. The new TD-SCDMA network will have a two or three year shelf-life or as long as it takes to ramp-up TD-LTE. China Mobile may be on the warm seat for the next few quarters and they may be quite pleased to have iPhone 3G “as is” (it will work just fine on GRPS/EDGE 2.5 G) and deal as best they can with their own TD-SCDMA issues.

If Apple follows their present modus operandi with international iPhone launches, then I expect we may eventually hear about a second carrier deal in China … with China Unicom (who may very well obtain a W-CDMA 3G license).  

iPhonAsia has received word from a telecom source in China (although I cannot vouch for the source’s authenticity or legitimacy of the tip), that Apple has agreed to exclusive talks with China Mobile as long as negotiations continue in good faith. Based on China Mobile’s recent public statements, it now appears that talks are at a serious stage. Therefore, if my source’s info is correct, Apple will not talk to China Unicom until a deal is concluded with China Mobile. Apple might then move to close a deal with China Unicom. It is possible that China Mobile will negotiate for a few months of exclusivity. Apple does not have to launch all carriers in the same market at the same time. Could China Mobile win an outright iPhone exclusive in Mainland China ala the Apple/AT&T deal in the USA?  Sure… However, China Mobile would likely have to offer some special concessions to Apple (e.g. Chinese iPhone users’ access to a China version of MobileMe, AppStore and possibly even iTunes for China).

Remember the fanfare last year when Research in Motion announced their exclusive deal with China Mobile to launch Blackberry in China. The press and pundits lauded this as a coup for RIM. Turns out the Blackberry deal was not so sweetApple will not make the same mistakes and keeping the China Unicom option open, will help to ensure a deal(s) that will be a win for China carriers, for Chinese consumers and also for Apple.



12 Responses to “iPhone 3G in China – Path cleared for a deal”

  1. li says:

    You must understand the politics. TD is technologically viable but its weakness to becoming popular is in the lack of desirable handsets. Consumers will be attracted to TD when they see handsets from Apple, Nokia and Google. Apple’s 3G TD Iphone
    will make TD 3G become fashionable in China. A 3G Iphone without TD will only hurt TD. China Mobile will subsidize the purchase of TD Iphone handsets and take mass quantities upfront. I think the deal will be announced during the Olympics along with a massive 300 city TD network buildout that will begin after the Olympics. Apple and Nokia will own the 3G TD handset market in China. Apple has what the Chinese people want and when the 3G TD handset is released Apple will sell millions of 3G Td Iphones in the first week. It will be a mania.

  2. Vijay,

    Thanks for weighing in. I agree that a TD iPhone remains an outside chance. Moreover, mid 2009 might be the earliest a TD iPhone could be available. Yet, it is an interesting point for discussion given the 3G politics in China. One way or another we will see an official iPhone 3G in PRC.

    Kudos to you for your reports and posts months ago over the internal chipsets in iPhone 3G. You pretty much nailed it

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