iPhone in China: China Mobile or China Unicom‾

Sherrie Huang/Ovum
24 Feb 2009

The iPhone distribution negotiations between Apple and China Mobile were first reported in 2007. While many expected to see the two shake hands, no deal has yet been announced and it is now rumored that Apple will partner with China Unicom instead. What is interesting is how the competitive environment will influence any cooperation.

There are benefits for both parties in such a deal. For China Mobile, the deal will help it to increase its brand value. Given the iPhone's strong appeal among high-margin subscribers - Apple sold 6.9 million 3G iPhones within the first quarter of its availability (to 27 September 2008) - China Mobile would be able to compete more effectively.

In addition, there is already great interest in the iPhone in China. For example, China Mobile reported that there were about 400,000 iPhones - bought via the gray market - being used on its network at the end of 2007. Therefore, we estimate there are currently over 1 million iPhones in China

For Apple, China Mobile's huge subscriber base and the growth prospects of the mobile content and application market make this deal irresistible. According to the MIIT, there were 641 million mobile subscribers in China by the end of 2008, with China Mobile claiming a market share of 71%. The mobile penetration rate in China is still less than 50%, providing huge potential for further growth. Moreover, we forecast that wireless multimedia service revenues in China will exceed $11.5 billion by 2010.

However, there are significant barriers to this deal. Although Apple is no longer insisting on the revenue-sharing business model that it initially pushed for, it still has other firm requirements including iPhone subsidies from the operator, no SIM locking, use of the iTunes music store, and the Apple App store as the central buying location for value-added services. China Mobile is unlikely to make concessions to meet Apple's expectations and relinquish control of the mobile content and application value chain given that it is developing its own application store.

Another barrier lies with TD-SCDMA. The 3G license that China Mobile was awarded is for TD-SCDMA, while the 3G iPhone supports W-CDMA. To develop an iPhone supporting another standard would be costly and time-consuming, with limited scale advantages.

China Unicom can leverage the maturity and scale of WCDMA/HSPA

Since receiving the WCDMA license, China Unicom has accelerated negotiations with Apple on iPhone distribution. If a deal can be struck, China Unicom will probably launch the iPhone together with its 3G network in the first batch of cities in May 2009.

However, China Unicom's 3G network deployment is well behind that of its peers. With the government's support, by December 2008 China Mobile had already covered ten key cities with 340,000 TD-SCDMA subscribers. China Telecom is upgrading its CDMA network to 3G EV-DO. However, China Unicom must build a W-CDMA network from scratch.

China Unicom's strategy to fight back is to leverage the maturity and scale of the W-CDMA/HSPA ecosystem. A possible deal with Apple would give China Unicom an effective weapon to compete.

If Apple cooperates with China Mobile and develops a TD-SCDMA version of the iPhone, the TD-SCDMA ecosystem will benefit from a new supporter.

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