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China Mobile Adds the iPhone Follow-up

I received some really interesting feedback from several readers to yesterday’s piece about China Mobile finally adding the iPhone:

  • China Mobile may not need its own iPhone. I updated yesterday’s post with this point, but in case you missed it, Naren Balaji pointed out this Forbes post:

    Apple AAPL new iPhone 5s and 5c support more LTE wireless bands than any other smartphone in the world. Currently the two new iPhones support 13 LTE bands including Bands 38, 39 and 40, which are needed to work on China Mobile network. However, China Mobile has also stated that mobile devices will need to support TD-LTE Band 41 starting next year.

    I asked one of the technical executives of a Radio Frequency semiconductor company to explain Band 41 and this is what he said, “Band 41 has a relatively broad bandwidth of 194MHz and its frequency range lays on top of Band 7 and Band 38. On the low end it is close to the top end of the ISM (Industrial, Scientific and Medical) frequency range, which may cause some co-existence challenges necessitating additions or changes to RF front-end components.”

    He added “If the current chip-set offers support for TD-LTE then the addition of support for Band 41 could be accomplished via software (and the RF front-end changes mentioned above) assuming a world phone capability is desired. If the current chip-set is not TD-LTE capable or if there is a desire for a TD-LTE only phone than a change in chip-sets will be necessary.”

    This is way out of my area of expertise, but what interests me the most is whether or not gray market phones can be used on China Mobile’s network. I still suspect no, which would likely have a material impact on Apple’s Greater China results, but we’ll have to wait and see.

  • China doesn’t have number portability, limiting the attractiveness of carrier switching. This was first pointed out to me by Jay Wang, although it’s not completely accurate. China has actually been trialing number portability in Tianjin and Hainan provinces since 2010, but to little effect, primarily due to restrictions put in place by the carriers. This paper has a lot more details if you want to learn more. The net result, though, is that in practice there are significant barriers to switching networks, which helps explains all those iPhones on EDGE on China Mobile.

    Moreover, in Chinese culture in particular, numbers have significant meaning. For example, when we were buying a car here in Taiwan, one of the incentives the salesperson offered us was the right to choose our license plate number. I’m not talking about personalized license plates – those don’t even exist here – but simply numbers. My wife was thrilled.

    This is compounded in China, where certain blocks of numbers have strong indicators of personal status. Lawrence Li explained this in an email:

    If we are going to talk about prestige, I think we need to break down the China Mobile subscribers by the first three digits of their cellphone numbers. Some of the more common CM numbers start with 139, 138, 137, and 158. Curiously, they have quite different associations in people’s mind.

    For instance, 139 is among the earliest cell numbers, back in the 1990s when only a small number of well-off people in China could afford a cellphone. It is for this reason that 139 numbers are considered to be prestigious by certain (but not all) people, especially in the business realm. I have a friend who explicitly says that he wouldn’t let go of his 139 despite its shitty GPRS/EDGE data network, because it often creates a positive first impression.

    The newer generation scorns this mentality, of course. And to be sure, owning a 186 number (owned by China Unicom) several years ago is considered cool and hip among the tech section, because it shows that you are an early adopter: 186 is among the earliest 3G numbers popularized in China.

    The implication is that it’s unlikely most would-be iPhone customers have fled China Unicom (as they did to an extent from Verizon and NTT Docomo for example). Rather, they have been biding their time for the iPhone to be available (or have bought a gray market one and used EDGE).

  • Those 45 million iPhones on China Mobile were unsubsidized. As Eugene Kim noted on Twitter, these folks by definition are at the upper end of the income curve. Zhe Wei expounded on this via email:

    There will definitely be quite a few new iPhone users, thanks to the contract offered by China Mobile. Before the deal, most China Mobile iPhone users bought unlocked iPhones, which have a higher price. (Actually, before the iPhone’s introduction to China with Unicom, there was not even a market for contract-based subsidized phones.) With the subsidized contracts now, the price of iPhone is actually lower. That will be a major reason for new iPhone sales due to this deal (especially for those who can expense their cell phone to their companies).

    There are a couple of interesting nuggets here. First, the iPhone introduced the very idea of subsidization to China. I’m not surprised to hear this, as this was also the case in Taiwan. My last smartphone before the iPhone was the Nokia N73, for which I paid about $600 dollars from a phone dealer, and paired it with a $20/month contract from a carrier. That was totally normal. The iPhone, though, was introduced in Taiwan with a subsidy and higher monthly plan, which is now commonplace.

    Second, the addressable market for a subsidized iPhone is certainly larger than the addressable market for an unsubsidized one – there are only so many people who can afford $650 out-of-pocket.

Finally, a quick expansion on my last point from yesterday’s note:

The low-hanging fruit is gone. For several years now any questions about APPL’s growth prospects have had a simple answer: just wait until they add NTT Docomo and especially China Mobile. Well, they now have, and the only way forward for significant iPhone growth is the long slog of winning new customers. I certainly think Apple is up to it, but there are no more home runs.

To be clear, Apple will reap significant growth from this deal, and by definition that growth is in the future. However, said growth will be quickly priced into the stock (if it’s not already). What I’m referring to is growth beyond this deal. Apple is hugely dependent on the iPhone, and the easiest way to goose iPhone growth is to add distribution. That, though, is largely over now.