Bill Bishop on Apple: We Need More Mojo

Temporary Hutong, Wangjing
K-Pop O.D.
1307 hrs. 

Sinocism editor Bill Bishop wrote a thoughtful piece about Apple (“Apple Needs China Mobile Deal to Regain Smartphone Mojo”)  that ran in USAToday late last week. Reading between the lines, Bill’s motive for writing the article is to give context to the excitement that rumors of a China Mobile deal are stoking among Apple shareholders. Since even before the iPhone was officially introduced in China in late 2008, speculation has been rife about whether, when, and how China Mobile (CMMC), the nation’s largest carrier in number of subscribers, would offer the phone to its users.

Five years later, the speculation continues. Yet while Apple fans talk up the company’s stock with visions of a Yangtze-sized cataract of money that flow into Cupertino’s coffers, questions persist about exactly how big of a win it would be for the company.

Tim’s Empty Quiver

First, as Bishop points out, Apple lacks leverage with China Mobile. At this point, Tim Cook’s company needs CMMC more than the carrier needs Apple. The iPhone has a shrinking share of an increasingly competitive market, and the company has made no secret of the extent to which its profits depend on China. China Mobile would almost certainly have used those facts as leverage in negotiations.

Arguably, China Mobile does suffer for not having the iPhone in its display cases, but the company has managed to do quite well without Apple, especially as the selection of devices that run on its unique TD-SCDMA 3G network and its new TD-LTE fourth-generation network. For this reason, it is possible, if not likely, that Apple made commercial concessions to get China Mobile to offer the phone. China Mobile is unlikely to be prepared to subsidize sales of the phone, especially given its keen watch on cost management over the past years. Apple may not be able to expect the high returns it once enjoyed on the device, especially if China Mobile agrees to put a bunch of advertising dollars behind the introduction.

More Users, or Same Old Users?

Second, and more important, we do not know the extent to which China Unicom and China Telecom have slurped up everyone in China who wanted an iPhone. Because a phone number change is mandatory when upgrading to a smartphone, many people took the leap with China Unicom, whose once anemic network has improved radically in recent years. As such, most of those who really wanted an iPhone may well have gone ahead and jumped to China Unicom or China Telecom.

Granted, China Mobile does have 130 million 3G users who don’t have an iPhone, and you can bet if China Mobile cuts a deal with Apple both companies will put big marketing dollars behind the device. But most of those users were added to CMMC’s 3G rolls after China Unicom introduced the iPhone, so you have to wonder whether those users are really going to care.

Finally, while a deal with China Mobile is a necessary step for the iPhone to regain its market share and “mojo” in China, it is not likely to be sufficient. As even Bishop admits, the iPhone is not “cool” anymore. Making it available to a whole lot more people is not going to help the cool factor much, and is likely to sandblast off whatever remains of the iPhone’s snob appeal. It will become, in the words of a good friend of mine, like “wallpaper:” ubiquitous and unremarkable. And that, for Apple investors, means that the premium will be eroded.

More than just Distribution

Facing a steroidal Samsung, plucky HTC, and local favorites Xiaomi, Huawei, ZTE, and Lenovo, all running some form of the increasingly impressive Android operating system, the iPhone needs more than a larger addressable market: it needs to get sexy again.

That’s a tall order. Chinese mobile users swarm to and discard phone manufacturers periodically, never to return in the same masses again. This happened to Ericsson and Nokia in China. Within three years of getting dumped by Chinese users, Ericsson was groping for a partner to save its bacon in the devices business. Nokia lost its luster three years ago, and today its mobile phone business on its way to becoming part of Microsoft.

I’m not ready to suggest that Apple is entering a similar tailspin. But what it does over the next six months will determine whether it regains its seat at the head of China’s mobile phone table, or whether it gets shoved further and further down the ranks in a very robust market.

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Whether Apple needed to provide China Mobilie more favourable terms all this time that Apple knew it was the largest carrier in terms of customers in the world is probably not Apple’s way of looking at it given the most recent interview Tim Cook gave to Businessweek Sam Grobart last week where he repeats earlier comments of his objective not going after market share blindly, not selling the most phones, and not going after the low end share of the market. The new iPhone models were launched on day one in China and China Unicom and China Telecom are selling them. That we do know.

There are other plausible scenarios other than assumptions that Apple needed China Mobile for growth reasons alone.

In the past China Mobile never expected Apple to build them a China Mobile only TD-SCDMA iPhone as the economics of it would not simply work successfully unless handset prices were raised for it or all handsets. (Buying an extra radio receiver chip from Qualcomm at a less than desirable price at the time, having to produce a separate motherboard just for that model, or even requiring a bigger motherboard to all the other iPhone models (probably increasing their dimensions) if the chip would be included on just one of the two models for radio receiver it ended up producing.) This technical and economic hurdle was discussed by more than one analysts covering China and things would change with an upgrade to 4G.

Qualcomm did have a future chip planned and eventually announced for both 4G TD-LTE and the other standards all rolled into one but all OEMs would have to wait until just recently.

All that time passing by, China Mobile had no licence for 4G and still does not have a full operation 4G network to over on a national level that is out of testing on a restricted basis. They have a compatible 2G capability with existing GSM iPHone handsets and many of their customers brought them to the network without official support.

The first 15 4G handsets for China Mobile that can run on its networks were just announced within the last two weeks.

So Apple leadership could attend a semi-annual meeting with China Mobile executives since 2008, bide their time, simply listen to how many subscribers China Mobile bragged it had knowing that activations of iPhones have grown without any support from China Mobile directly despite the speed of it being crippled back to 2G data speeds.

From zero to 42 million in size.

Of course Apple without lifting a finger gained the profit from 42 million iPhone sold somewhere in the world, brought to China and activated on China Mobile.

The numbers have been a steady 1.5 million activations per month over the last 12 months roughly.

China Mobile really didn’t lose much in profits but only in prestige and reputation among its customers.

It is important to point out the growth of the China Unicom base of 3G subscribers grew steady by over 40 million in the same period of their selling the iPhone. Many of their customers opted for an iPhone using its faster speed and that might represent China Mobile potential loss of customers.

At the end of all these talks Apple could simply say “Our iPhone handsets have become internationally popular among users and we hope to cooperate with you one day like we have begun cooperation with the GSM compatible carrier China Unicom.”

And then two years later the conversation would add then China Telecom cooperation as well. Same pattern. The 3G uptake grew and the iPhone sales grew.

The China Mobile leaders would already know it but Apple could show them some face and still go along to meetings and repeat “Our iPhone handsets have become internationally popular among users and we hope to cooperate with you one day like we have begun cooperation with the iPhone carriers China Unicom and China Telecom.”

The China Mobile network still did not have any option for an iPhone because of the technical restriction of no other carrier of any size in the world using TD-SCDMA. It would be a China Mobile only phone and Apple could not sell it to others.

Finally when 4G network upgrade plans came to light and knowledge of new Qualcomm chips including a suitable chip for all these radio standards used in China, China Mobile and Apple probably started to talk more in actual business terms.

Apple would assume China Mobile would know the China Unicom and China Telecom the actual terms of contracts as they all have the same largest shareholder and telecommunications regulator: the government.

And they could just work the same ratios give the customer/subscriber base if China Mobile executive were pointing to it.

Apple would want a number of dollars to spent on handsets over a a four year period as a term of the contract (see $20-25 billion Sprint deal in the US. China Mobile would mean around $100 billion over four or five years of a contract yet Apple could easily knock off $20 billion if not more to give them something to report back to the political minders)

And maybe a demand that up to 40% of new phones be iPhones (see recent convert past Japan holdout NTT DoCoMo and its rumoured deal with Apple) as a term was raised as well as Apple was just starting to get suffer from Samsung buying celebrities using Weibo to demote the iPhone for the Samsung one.

That kind of discussion would have happened in January 2013 when Apple just announced sales of a record 47.8 million iPhones sold in the previous quarter over their last launch of the iPhone 4 at 21 million units just over a year earlier. They did not need China Mobile then because they could not produce enough of the product.

I believe they offered the same favourable 4 year terms as their other China partners to China Mobile who could accept the terms. China Mobile executives were eager for the iPhone as they knew how many unsupported phones came to their network, they knew about the slow shift to the other two iPhone carriers but they were probably told to go back and extract something more from Apple by their political minders and largest shareholders the Chinese government.

Meanwhile the political minders sent a sign as they have been known to do when they don’t get their way in negotiations. And the worse the emotional name calling gets the more one just has to wait out the attack spray and hold your be consistent at the negotiating table. At the end the attacks will slow or stop if you throw them a small bone.

In March 2013 the official media was working itself into a frenzy about Apple’s arrogance poor customer service and no other technical problem with handsets.

That is a telltale sign that Apple was not giving much in negotiations and the political minders did not like it. At that point the China Mobile executives probably pointed out that Apple knew what the other two carriers had as contractual terms and were being fair enough with them so let them get on with getting the business done so our customers will be happy as well. At the least, when the 4G network switch is thrown we should be on equal footing as the other two.

The media continued applying the pressure in the news as negotiations were being finalised. Then unexpectedly Apple CEO made a direct apology about of the media’s complaints about customer treatment, announced warranty changes to be equivalent with other countries and took the media noise off the table completely. There was the bone.

Besides the social media comments already were showing how many in the population thought the complaints about Apple, its product, its service were not based on anything in the real world and somebody in the official media was throwing a hissy fit for ulterior motives.

Following that, the President’s wife was accidentally captured in photos openly using an iPhone on an overseas trip in Mexico and somewhere other country as well. She surely could not be attacked by the press for choosing to use an iPhone from an arrogant company treating Chinese badly could she? And it was pointed out she was using a non-China Mobile handset to boot.

The media came up and whimpered one or two times but had no real factual basis to complain from as the people had different notions about Apple.

Apple issues have not been raised again.

Now is a deal done? Wait and see.

China Mobile stil has not set a date that its 4G is going operational nation-wide. China Telecom and China Unicom probably have a handset that will work on China Mobile 4G-LTE networks with the right baseband settings applied to it and no matter what will be taken care of when the 4G network for those carriers are opened up nationwide.