Update – March 23, 2009: China Mobile’s CEO spoke to a reporter on Saturday, March 21, 2009. According to Wang Jianzhou, China Mobile’s talks with Apple have stalled, albeit “the door remains open.” This is no surprise as Apple is moving forward with China Unicom. Details > HERE (in Mandarin)
iPhonAsia Comment: Here (below) is iPhonAsia’s response to Dr. Cheng Dejie’s March 20, 2009 article China Unicom’s Apple deal may leave a sour taste published via Interfax. Read > HERE
iPhonAsia Responds to Dr. Cheng Dejie (Interfax)
Dear Dr. Dejie:
Telecom Analyst Dr. Cheng Dejie
Thank you for your interesting article. Your arguments are supported by facts, and I agree with many of the discussion points you’ve presented. Yet there is a general theme in your article that I do take issue with. That is the idea that China Unicom may regret any agreement they make with Apple that compromises their ability to control wireless value added services (WVAS).
The title of your article “China Unicom’s Apple deal may leave a sour taste” clearly implies that a deal with Apple might not be mutually beneficial. I would disagree. China Unicom has had ample opportunity to conduct their due diligence and analyze the market opportunities that iPhone presents. To conclude that China Unicom may be taking steps that will not be in their long-term best interest is, in my opinion, an underestimation of China Unicom executive management’s business savvy. I would agree with your point that any successful negotiation with Apple would require that the iPhone (Apple) retain control over many core wireless value added services (WVAS), such as iTunes and the Apple App Store. However, I think you will be surprised to find how ready, willing, and able Apple is to make strategic compromises to better serve Chinese wireless consumers.
I believe in the long run, focusing on what’s best for the Chinese consumer, will prove to be the winning strategy for China’s wireless telecom companies. In the past, many carriers imposed their will on handset manufacturers. Many phones were customized to suit the carriers’ branding and proprietary services. Industry insiders often referred to these customized handsets as “crippled phones” due to their ability to serve only one master … the carrier.
That was then, this is now. On January 9, 2007, during the MacWorld Keynote, Steve Jobs unveiled the iPhone, the first truly “smart” mobile device to converge cellular service with music (iTunes) and the real Internet (not a WAP). Millions of consumers were immediately smitten. Of course iPhone did not receive uniform praise. The loudest “boos” came from competing manufacturers/carriers and their paid “media savvy” consultants. But the consumer wasn’t listening to pundits and critics. All they had to do was pick up an iPhone with its vibrant screen, Safari browser to the real Internet, highly intelligent and intuitive user-interface (no manual necessary), and they were convinced. It was a “must have.” What’s more, the iPhone is not a prisoner to fix buttons. It is designed to evolve. Evolution is part of Apple’s promise to buyers; a promise that Apple has delivered on again and again. My own 1st generation iPhone has now been (easily and at no cost) upgraded multiple times and I’ve downloaded dozens of cool and fun applications.
800 million downloads!
I am not alone in enjoying the iPhone evolution/revolution. Over 17 million iPhones have now been sold and as of March 17, 2009, after only 8 months of operation, an astounding 800 million applications have been downloaded from the Apple App Store hosting over 25,000 applications. And now the 3.0 OS upgrade will take iPhone to a whole new level. The game changed forever on January 9, 2007. A paradigm shift is underway and mobile communications will never be the same.
Back to the key question you raised in your article… “Who can or should control the WVAS?” Right now everyone (carriers and OEMs) is charging full-speed ahead to build their own app store and proprietary value-added services. Some may succeed, and others will no doubt waste 10s of millions in a vain effort to create a winning platform. I believe carriers that elect to build their own WVAS and also embrace smart phone manufacturers’ WVAS will wind up the winners. This openness will also make for happier wireless consumers.
I am not privy to any of the plans or strategies that may have come from current Apple and China Unicom negotiations. One might imagine that China Unicom will pursue their own WVAS while at the same time allowing iPhone subscribers to enjoy many of the current Apple services. Apple and China Unicom can learn from one another and forge a successful partnership. This partnership can be financially rewarding for both Apple and China Unicom. Most importantly, Chinese wireless consumers will be the biggest beneficiaries of this partnership.
Consider that Apple has gone to great lengths and expense to make the App Store a true e-commerce vehicle for developers who receive a 70% share of all application revenues. There is no question in my mind that
iPhone integrated with peripheral
Apple would work closely with China Unicom to ensure that there are a wealth of “for China” applications on Apple’s China App Store. I suspect that several new iPhone applications will be developed directly by China Unicom, who’ll receive at least 70% of the revenue. One or two of these applications may even be preloaded on an iPhone for China Unicom. After the iPhone 3.0 OS release, applications can be developed with “in app” purchase options (e.g. online magazine subscriptions, city guides, etc.). There are also now many ways an iPhone can interact with peripheral devices. This presents additional opportunities for ongoing revenue for businesses and developers and greater “value-add” for Chinese iPhone users.
The bottom line… China Unicom’s Apple deal can be very sweet indeed.
More background on Apple and China Unicom iPhone negotiations …
NOTE: The following is based on my research together with a large measure of outright guesswork. In other words, my analysis should be filed under “rumor,” “speculation,” and “opinion.”
Gang Li
A China Unicom executive contingency, led by Executive Director of Mobile Communications Gang Li, arrived in Cupertino on Sunday, March 8th for meetings with Apple. The objective of this summit was to move iPhone negotiations to a serious level. The negotiation points likely included:
- The issue of a subsidy payment from China Unicom to Apple for each “on contract” iPhone.
- The issue of WiFi and China’s WAPI security standard. Apple may be required to disable WiFi on iPhone in China. This would not be unprecedented. Apple has already disabled WiFi for iPhone in Egypt.
- The issue of exclusivity. Whether China Unicom will have exclusive carrier rights in PRC and whether any “exclusive” will be limited to “3G” or to all iPhone models and any other Apple 3G enabled mobile device (3G tablet).
- Whether Apple will agree to pre-load iPhone with applications that are popular in China (e.g. Youku vs. Youtube).
A recent report via ccw.com.cn (??????iPhone????) indicates that the China Unicom
iPhone 3.0 OS
delegation remained in discussions for a full two weeks and did not return to Beijing until the evening of March 18. It is therefore quite possible that the China Unicom team was in town for the Apple 3.0 presentation (< watch) delivered at Apple’s HQ in Cupertino on St Patrick’s Day (March 17). My guess is that the China Unicom executives were sequestered in the upstairs conference room (above Apple’s Town Hall facility) where they could watch the iPhone 3.0 event by closed-circuit television. This extra discretion would be important as the national media was invited to the 3.0 event and a group of well-dressed Chinese gentleman would raise journalists’ curiosity, and might cause the press to connect the dots to China Unicom. Apple and China Unicom would prefer that any “deal” remain a secret until all formal agreements and China Ministry (e.g. MIIT) approvals are signed sealed and delivered.
What are the final steps? The deal may be concluded after the Ministry of Industry and Information Technology (MIIT) gives iPhone its official approval (soon). There have been reports that Apple provided China Unicom with a non-WiFi iPhone for final MIIT tests. Another key step might be an Apple visit to
China Unicom Chairman Chang Xiaobing
China. My guess is that a group of senior Apple executives will travel to Beijing to meet with China Unicom CEO Chang Xiaobing and other executives. This would be a professional courtesy and show of respect for the China Unicom delegation that recently visited Cupertino. It would also be an opportunity for Apple to meet with Lou Qinjian, Vice Minister of China’s MIIT. There is also the possibility of a side trip to meet with China Mobile CEO Wang Jianzhou and continue those “cooperation talks” that we’ve heard so much (or so little) about. Spring is a nice time of year to visit China. There are sites to see after all.
May 17 for an announcement with a launch this summer?
There have been several reports suggesting that an official iPhone agreement between Apple and China Unicom could be announced on May 17. This is the same day that China Unicom will be launching, on a trial basis, the new W-CDMA 3G network in 55 major Chinese cities. The full network (283 cities) rollout will not happen until the end of 2009. May 17 appears to be about the right timeframe to make an official “iPhone in China” announcement; however, an iPhone launch may need to wait until the summer months. Apple’s Worldwide Developer Conference is often scheduled for mid-summer and that might be the right forum to unveil new iPhone models. I would not expect a China launch until Apple has formally unveiled their “gen 3” mobile devices. It should be a busy summer in Cupertino and in Beijing.
What’s going on between Apple and China Mobile?
As for the prospects of an iPhone deal with China Mobile … A “3G” deal looks doubtful, a “2G” deal is possible, and a “4G” deal will likely remain an open topic of discussion.
I agree with part of the statement you made in your article; “Apple clearly stated that it will not include TD-SCDMA functions in its handsets, which totally ended negotiations.”
I know that Apple has not commented on TD-SCDMA and I doubt that China Mobile would ever publicly admit that TD-SCDMA 3G is a “deal breaking issue.” However, I absolutely do believe that TD-SCDMA network concerns have been a major factor in Apple’s decision tree. More on TD-SCDMA issues later…
The public reasons (leaked to Chinese media) given for Apple and China Mobile’s failure to come to terms have been over control of the App Store and WVAS. It appears that China Mobile pushed hard in an effort convince Apple to remove services from the iPhone (no WiFi, no App Store, no iTunes, etc.) in favor of China Mobile’s own WVAS. If the press rumors are true, Apple said “No!” I don’t blame them. A “stripped down” iPhone morphs into something that Apple would not want to call “an iPhone.” It’s really that simple.
Apple “cooperation talks” continuing with China Mobile? …
China Mobile CEO, Wang Jianzhou
Despite divergent views over who (Apple or China Mobile) should control WVAS on iPhone, and TD-SCDMA concerns, I am not sure that discussions have “totally ended.” According to China Mobile CEO Wang Jianzhou, Apple and China Mobile are (or were) “still talking” under a non-disclosure agreement (NDA). An interesting quote on March 5 from China Mobile CEO Wang Jianzhou: “We hope the iPhone can be used on China Mobile’s network, and Apple has demonstrated its will.”
What might be going on in these reported “talks?” I honestly have no idea. It could be something big, something small, or nothing at all. Here are a few possibilities:
- Apple and China Mobile could be discussing an EDGE 2.5 G iPhone Nano (iPhone Nano [if it exists] might be a 2.5G model, and this might not conflict with a negotiated “3G” exclusive for China Unicom)
- China Mobile may be discussing a future TD-LTE Phone 4G (at least 18 months down the road)
China Mobile may also be considering ways to retain existing iPhone users. China Mobile has approximately 1,000,000 iPhones now running on their EDGE 2G network. At least ½ of those are the new iPhone 3G and many of these handset owners are not on contract (290 million of China Mobile’s 463 million users are pre-paid and can freely switch carriers). If China Unicom lands the iPhone, they will no doubt attempt to entice existing iPhone 3G owners to “upgrade” to 3G.
China Mobile going for full control of WVAS…
China Mobile has made no secret of their intent to build their own app store (to be called “Mobile Market”) and promote their own WVAS platform – Monternet, including music services (www.12530.com) and a Web 2.0 platform (similar to Mobile Me). China Mobile made 27% of their revenue in 2008 through their WVAS and they don’t want any leakage to handset manufacturers.
As you noted, China Mobile has already launched R&D for its own Android powered mobile operating system, jointly with cell phone producer Lenovo. The new MOS has been dubbed Ophone. With its own operation system, China Mobile can install more services of its own. China Mobile has also paid Topssion and Accenture plenty of RMB to work
Levono Ophone
on customization plans for TD-SCDMA 3G handsets and perhaps to continue feed them ideas they want to hear … “you can build your own mobile OS and app store just like Apple … and here’s how can we help” (more Accenture projects and billable hours… yes, I’m a cynic).
Nokia’s concerns offer clues as to why Apple said “No” to a customized TD iPhone 3G…
This effort to integrate TD-SCDMA handsets with China Mobile’s own mobile operating system and WVAS is an expensive and risky proposition. Nokia has apparently balked at pouring their own money into this initiative. Consequently, earlier this month, China Mobile revealed that it would invest 600 million RBM with Nokia and other handset manufacturers on research and development on TD-SCDMA handsets. Why is the most dominant wireless carrier in the world (China Mobile with 463 million subscribers) dolling out R&D money to handset producers to build TD-SCDMA phones? Especially to Nokia who has dominant market-share in China (37% of handset sales in China are Nokia) and has invested heavily in maintaining good standing with China Mobile? Serious question. Why? You’d think Nokia would be falling all over themselves to rush deliver a new TD Nokia 3G phone for China.
TD-SCDMA Handsets
A large part of that answer may rest in the fact that China Mobile has an obligation to China’s Ministries to rollout the “indigenously innovated” TD-SCDMA 3G network. And yet China Mobile is now rushing development of TD-LTE 4G as fast (and quietly) as they can. CMCC will no doubt spend whatever amount is necessary to stabilize TD-SCDMA, but its future is far from certain. The tenuous future of TD-SCDMA may be a primary reason why Nokia will not take on further TD-SCDMA handset development without a cash stipend. A secondary reason may be the substantial WVAS customization China Mobile is insisting upon, along with the integration of China Mobile’s new “on the drawing board” Ophone. This is a terribly expensive undertaking for Nokia with no assurance that the customized (“crippled”) TD handsets will sell.
Why Apple said “No” to TD-SCDMA…
In your article, you questioned why Apple balked at an agreement to build a TD-SCDMA handset. In my mind, this was a “no brainer” decision for Apple. It’s my belief that Apple went to great lengths to give the nascent TD-SCDMA 3G protocol a trial, including dedicating engineering resources and possibly some design/build efforts. But any special TD iPhone 3G model is likely to remain under “lock-in-key” in the engineering vaults in Cupertino.
Why would Apple say “No” to TD-SCDMA 3G? …
- China Mobile’s “end run” rush to build TD LTE 4G is a statement that TD-SCDMA may have a very limited life span (2 years or so).
- TD-SCDMA is based on now “dated” Nokia Siemens technology.
- Network usability problems continue (dropped calls and interference near tall buildings).
- TD-SCDMA 3G iPhones would not be usable outside of China, albeit they would likely be backward compatible to 2G EDGE networks.
- China Mobile has blamed the current crop of TD-SCDMA handsets for network usability problems. Would China Mobile reverse this “blame the phone” tactic should Apple launch a TD iPhone 3G? Not likely.
- Apple understands very well that network bugs can tarnish the reputation of handsets.
- Apple does not want to have their debut in China spoiled due to network reliability issues.
Despite the possible conflicts over WVAS and TD-SCDMA, it is my hope that Apple and China Mobile can find common ground and a basis to work together. A large cross-section of China wireless consumers are using China Mobile’s network and services. Whether it be a 2G iPhone Nano, or a 4G TD LTE model, it would be great to see two of the world’s most respected companies (Apple and China mobile) working together.
Thank you again for your article. I enjoyed reading it and appreciate your point of view.
Respectfully,
~ Dan Butterfield, Editor, iPhonAsia
Some comments / points / thoughts on iPhone in China
(Most are from an end user perspective rather than a network providers point of view though)
The current set of new users will be ones that are replacing older sets (2G / lost phones). Pretty much anyone who wants/wanted an iPhone has one in China. There is room for growth, but the initial set of sales will be more sluggish due to the saturated market.
iPhones are already widely available in 1st and 2nd tier Chinese cities.
China already has close to 1 million Apple iPhone users (possibly more, but uncorroborated).
99% of these users are using jailbroken handsets.
There is already a huge community support for iPhones, which is good, although quite a lot seems to be around distributing hacked applications – users are quite adept in downloading and installing stuff from popular sites like WeiPhone.
All grey import phones bought currently will be pre-hacked, and are usually loaded up with a selection of games / apps.
Apple has already shot themselves in the foot here with regards to iPhone – most users hear stories about upgrading breaking their phone, so will be loath to upgrade on official units.
I could go into this in more length, but suffice to say, its not good for their brand image.
They (Apple) already have a terrible image in China with regards to support for Apple equipment as it is. This impacts things like Grey Import vs “Official”. In most cases Grey Import goods get better service from the vendor than Apple provides with a real unit.
Its likely that any iPhone released in conjunction with Unicom will be locked to carrier.
A worrying point is the lack of Wifi on the phone in the listings on Unicom’s site. While this isn’t unprecedented, it won’t bode well for sales.
Given the choice between an “Official” one missing WIFI or a grey import which has all the features, most people will purchase the one which offers all the features.
Currently people can either buy a grey import phone from US – cheaper, but not easily upgradable by end users/ or requires a Piggy Back Sim, or a slightly more expensive unlocked Territory iPhone – HK, Italy, and NZ sourced phones are easily bought here.
Another issue (as you’ve covered), is regionalizing the phone.
Youtube is a non-starter here obviously.
Youtube just doesn’t work here unless you’re prepared to wait 20 minutes for a 3 minute clip to load. Regionalizing with Youku or Tudou would be the smart move, and an even smarter move on Youku or Tudou’s part.
I would assume either company is in talks right now about this. If not, they’re missing out on a huge opportunity.
Issues are going to arise however if the iPhone has no wifi, and they don’t have unlimited GPRS/3G plans. Users will be loath to use the iPhone networked apps for anything other than essential use (eg mail) if it has a real time effect on their pockets.
Apple has been ramping up Chinese App store work over the last month – this can be seen by the “sudden” appearance of Chinese apps in the top 25 featured apps on occasion when browsing from China.
@Lawrence … Thanks for weighing in. I always appreciate thoughtful responses such as your’s … It’s also very helpful to get reports from China. Please feel free to share further insights.
While Wifi is an issue, it’s not beyond the realm of possibility that Apple will develop standards that meet the China’s homegrown WAPI (a proprietary encryption and authentication solution for WiFi). The downside is that WAPI likely contains backdoors to allow government surveillance of Wi-Fi traffic. In other words, status quo.
When the iPhone is officially launched in China (probably Summer 2009) I would expect to see new models with new features that will entice new buyers … I do not believe the market is saturated. I also expect that China Unicom will offer iPhone with a modest subsidy. This should make the iPhone 3G through China Unicom more competitive versus the grey market.
If I remember rightly, last time you asked me for comments I replied that your site was blocked in China. At least this time I can reply!
WordPress is open now, so feel free to ask away, until it goes all YouTube again.
I don’t see WAPI being on the agenda to be honest. None of the other providers bother either. Much like TD-SCDMA home grown 3G, its a non-starter out of the gate.
As people well know (and pointed out above), China Mobile is eager to dump 3G despite being government mandated, and move to something more viable. Hence the 4G rollout.
I still think that the market is saturated – or at least liberally watered
demand has been met by the grey market. Apple has got stats on this – 3G sales in HK bypass actual usage by a wide margin.
If this was announced a year ago, great.
As is is, too little too late.
Also don’t forget that Unicom’s network is widely perceived to be inferior to the incumbent China Telecom network. Most users are all to aware of this, especially in the larger cities.
While Chinese are price sensitive (most Unicom users are so for cost reasons), they aren’t uninformed. Unicom also has a reputation for being more spammy network wise than China Mobile.
The other death blow is the likelyhood of no wifi (although this will likely be easily resolved within days by the good people at TGBus or WeiPhone)
A quick straw poll of my staff when asked about getting an iPhone from Unicom with no wifi or a Grey market version with wifi had results unanimously going with Grey Import.
Unicom will probably offer some kind of 3G enticement deal to counter this though, which might work, especially if they can tie people up to a contract.
Another point is that strictly speaking “subsidies” are illegal here in China, although that doesn’t stop China Telecom from doing that on occasion. If Unicom did something like that, and China Telecom decided they were being too successful, expect to see some government interference.
Of course, all bets are off when Apple releases their new phone as is expected come summer time.
Again, this is all opinion, rather than “fact”, but I’ve been hear long enough to read the smoke signals.
Lawrence.
Thanks again for adding your perspective on iPhone from Shanghai. Please drop by any time with observations … especially as China Unicom gets closer to their WCDMA network launch.