iPhone in Asia reply to Blog post – The China Game part 1
Dan Butterfield Says: February 23rd, 2008 at 5:34 pm
Joe,
You said …
“Apple’s business model has no chance of succeeding in China. Most people in China do not lock themselves into any phone plans and those that can afford the upscale phones change them like underwear. Whatever the latest fad is, they will buy.”
“No chance” Joe? I give Apple at least “a chance.” Here’s why … The rich (China Mobile) want to get richer, and they certainly don’t want to lose ground to competitors.
Soon after the Olympics there will be a series of announcements detailing the restructuring of the China telecom industry (this is finally happening). One key move will be China Telecom’s acquisition of China Unicom’s wireless CDMA division. There may also be an announcement about a newly combined Unicom/Netcom being granted the rights to build out the W-CDMA 3G network. China Mobile will battle for the W-CDMA rights (China Mobile has been saddled with responsibility to make the TD-SCDMA work and they’re anxious to hedge their 3G bet given technical and logistical problems with TD-SCDMA); however, the Ministry of Information & Industry (MII) is, if my intel is correct, supporting Unicom/Netcom’s bid for the W-CDMA rights. What does this mean? Real, actual, legitimate, serious competition in wireless! Apple is aware of these developments and this is why (IMO) there has been no rush to conclude a deal with China Mobile. Competition means the game is about to change!
image courtesy BDA - http://www.bdaconnect.com:80/
Here’s why Apple has “a chance”:
· 287 million of China Mobile’s 356 million subscribers are monthly “pay as you go” vs “on contract with a data-plan.” It should come as no surprise that China Mobile very much wants to grow its “on contract with data-plan” customers … they are far more profitable/important to China Mobile’s future. NOTE: China Mobile has been growing subscribers at a clip of 5 to 7 million per month and the uptake in data services has been impressive (now 25% of China Mobile’s wireless revenue). While these numbers are positives for China Mobile, TD-SCDMA must be able to deliver wide coverage and high speed, or China Mobile stands to lose data-consuming customers to a carrier with the more scalable and reliable W-CDMA.
· The future growth in wireless revenues will come from value added services such as music, messaging, mobile video and mobile TV (CCTV on your phone). To grab this business, you need a reliable 3G (LTE 4G in the future) network, and subscribers who own handsets with excellent audio/visual capability.
· There is no phone that offers audio/visual and boosts data use like the iPhone! Period end of story. Net surfing increases 50 times and overall data-usage doubles or triples!
· A combined Unicom/Netcom w 3G license + W-CMDA with an iPhone exclusive, can steal a large slice of China Mobile’s customers (no jail-breaking or hack necessary).
· The new 3G iPhone will be more difficult (expensive) to hack.
- To further combat hacking, Apple can work out (with TBA China carrier’s blessing) a two-tier offering … Specifically, a locked iPhone with a 2-year contract (and presumably some rev share) and a premium-priced unlocked iPhone in the same market. This would follow the iPhone in France via Orange model (French law prohibits handsets from being locked to a network for more than 6 months). Such a move by Apple would preserve revenue sharing model (albeit slight less rev), as 70 to 80% would go with the locked phone, and at the same time deliver a death-blow to the black-market for hacked and jail-broken iPhones.
· Unicom/Netcom would likely offer an attractive “amnesty plan” for China Mobile’s existing iPhone “pay as you go” owners. They will be enticed to go on contract with Unicom with many TBA incentives and knowledge that they can upgrade their iPhones for free … no need to pay a black-market hack-a-phone shop for future Apple or developer upgrades.
· The soon to be unveiled iPhone SDK will come with many cool apps. All Apple and developer community apps will be delivered via iTunes (Apple apps will be free … no cost to iPhone owner, no cost to carrier, no black-market hack necessary).
Again … The rich want to get richer and they (China Mobile) don’t want to lose ground to competitors. China Mobile will likely push MII to win rights to run a dual TD-SCDMA/W-CDMA network. Regardless of whether China Mobile wins that battle, there will be another serious 3G competitor (Unicom) in wireless. Given the dynamics in China’s telecom industry and important growth strategies (mobile video watching, on contract data-plan customers) … I give Apple a chance.
Key Players in iPhone to China Negotiations
image courtesy BDA -
http://www.bdaconnect.com:80/
What kind of timeline are we talking about here? First Telecom/Unicom has to be granted the license, then they actually have to build out a W-CDMA 3G network. This isn’t a shake and bake instant network you can set up in a few months. All the while, the iPhone still is shut out of the legitimate Chinese market if China Mobile decides not to deal with them and play for time, with two advantages to their patience:
1. Unlocked iPhones still running on their network, bringing in revenue while not costing them anything in revenue sharing.
2. The new cellphones will copy and surpass iPhone features, minimizing the huge innovation lead that Apple has in the iPhone. Of course, this assumes that Apple’s improvements in 2.0+ versions of the iPhone will only be incremental, and not revolutionary.
Mike,
You are quite correct to point out that a Telecom/Unicom W-CDMA 3G network build-out would not be an overnight project. However, the same can be said for China Mobile’s TD-SCDMA 3G network. TD-SCMDA faces many challenges in months and years to come. See post – TD-SCDMA may not be an eternal flame.
Should Apple go with Telecom/Unicom, iPhone will work on Unicom’s existing GSM standard while the W-CDMA network is completed.
It’s not so much W-CDMA that worries China Mobile as the specter of legitimate wireless competition in China. As details about the forthcoming telecom industry restructuring leak out to the public, China Mobile loses some of their monopolist leverage. If you think China Mobile is unconcerned about restructuring and could care less about an iPhone deal, then read my post – “Press gets spun by China Mobile.” Me thinks they doth protest too much.
To your point #1:
“1. Unlocked iPhones still running on their network, bringing in revenue while not costing them anything in revenue sharing.”
Yep… China Mobile is having their cake and eating it too. But Telecom/Unicom is about to scrape off some icing and carve out a slice of China Mobile’s cake.
China Mobile can avoid frosting fingermarks on their cake by doing a deal with Apple and offering an official “no hack or jail-break necessary” fully upgradeable iPhone. iPhone would be attractive incentive to go on contract w. data-plan… more revenue for China Mobile.
If Apple works a deal with Telecom/Unicom, then expect to see incentives offered to China Mobile’s pay-as-you-go iPhone owners (slicing a piece from China Mobile’s cake)
No matter how attractive the offer, I expect many subscribers will prefer pay-as-you-go. This is why I expect Apple to offer both a locked and unlocked (official and upgradable) iPhone in concert with their new carriers deals … in China and throughout the world.
To your point #2:
“2. The new cellphones will copy and surpass iPhone features, minimizing the huge innovation lead that Apple has in the iPhone. Of course, this assumes that Apple’s improvements in 2.0+ versions of the iPhone will only be incremental, and not revolutionary.”
The fast rising middle-class in China do not want a knock-off iClone or lesser “iPhone killer.” InStat estimates that 20% of handsets sold in China in 2007 cost more than 4,000 RMB (US$533). In another words, there are an estimated 28 million (and growing) potential users for the iPhone in China.
If the 1st generation iPhone is any hint at what Apple can deliver to the mobile handset market, then it is a fair bet that Apple can continue to innovate and lead the “smart-phone” revolution.
Time will tell … no guarantees in this highly competitive game.
Thanks for your comment.
~ Dan B.