China Resists iPhone Deal for China Mobile on Subsidy Concerns

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Apple in China

The Chinese government is reportedly resisting a deal between China Mobile and Apple to carry the iPhone 5 because it finds this whole "carrier subsidy" thing to be irksome. The story emerged late last week from a Deutsche Bank analyst, who said there was little momentum for a deal between the companies after meeting with China Mobile management.

China Mobile is the world's largest carrier, with more than 600 million customers. That's not quite twice as many customers as the U.S. has citizens, and it represents 65 percent market share in China, to boot. It is also a company where controlling interest is owned by the Communist government of the People's Republic of China, and it's those government overseers who aren't keen on Apple's subsidy.

“We believe that the stars are not aligned for a China Mobile licensing of the iPhone 5,” Deutsche Bank analysts said in a note, as reported by MarketWatch. “The government is not supportive.”

China Mobile has bragged in the past that it has millions of iPhones on its network, even without a distribution deal with Apple. Customers have bought prior generations of iPhones on the grey market (unsubsidized, often at a premium), and then used them on China Mobile's EDGE 2G network.

This is because until the iPhone 5, Apple's market-defining smartphone hasn't supported China Mobile's home-grown 3G variant. The iPhone 5, however, is using what we call The One Chipset—one chipset to rule them all and in the iPhone bind them—from Qualcomm that works on every major 3G and 4G variant used around the world, including China Mobile's.

After Qualcomm announced this chipset, many had hoped Apple would finally be able to ink out a deal with China Mobile, significant extending Apple's reach into the world's largest market. If Deutsche Bank has it right, this isn't yet in the cards.

Apple has the highest margins in the industry, thanks in part to the industry's highest carrier subsidies. This is true at China Unicom and China Telecom, the next two largest carriers in China, both of whom are happy to pay Apple's subsidies if that's what it takes to get the iPhone. The two companies have been able to boost their smartphone subscriber rolls with the help of Apple's popular device.

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Getting a deal with China Mobile has to be a major priority at Apple—Apple CEO Tim Cook has personally met with China Mobile back when he was acting CEO. China is the world's largest market, and it is recognized far and wide as a major vehicle for growth at Apple. Landing that deal, however, can't come at the expense of compromising on iPhone subsidies.

Were Apple to do so, it would likely unravel the company's entire subsidy structure around the globe, costing the company billions in profits. It's a conundrum, and we're happy to be on the pundit-writing-about-it side of the equation, rather than being on the having-to-solve-the-problem team.

The Chinese government put the tract in intractable, and overcoming bureaucratic concerns over an issue like this when subsidies at China Mobile have an annual target—all carefully planned by those same bureaucrats—is clearly a difficult task. The proof is in the Apple pudding, or we'd otherwise be talking about a deal being inked between the two companies.

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2 Comments

Lee Dronick

“The Chinese government is reportedly resisting a deal between China Mobile and Apple to carry the iPhone 5 because it finds this whole “carrier subsidy” thing to be irksome.”

More likely the Chinese Government is irked about the amount of baksheesh.

iVoid

“The iPhone 5, however, is using what we call The One Chipset—one chipset to rule them all and in the iPhone bind them—from Qualcomm that works on every major 3G and 4G variant used around the world, including China Mobile’s.”

Huh, so why are there three different hardware variants on the 5?

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