Walter Hutchens’ Blog

Bloomberg reports here that Apple has failed to get China Mobile—mainland China’s largest mobile phone network service provider, by far—to sign up for a deal like the one Apple struck with AT&T—a deal whereby 1) Apple gives a carrier exclusive rights to sell the iPhone for a period of time in a given country 2) in exchange for a cut of the revenues the carrier earns from customers using those iPhones.

I own a few shares of both Apple and China Mobile, so it would be good for my personal finances if Steve Jobs were to announce in his Macworld keynote (schedule for this Tuesday) that CHL and AAPL have reached a deal. But that ain’t happening.

Some reactions:

1. Good for China Mobile—they did the right thing telling Apple to get over itself. Apple, ni shi shei? (who ARE you?)
2. This comes at an unfortunate time for Apple (and its shareholders)—Macworld Expo begins this week. Apple no doubt plans to dazzle the world with new product announcements (and reports of iPhone triumphs and Mac market share gains). Now all that will be muted by this news out of China. The media reports coming out of Macworld will now likely mention that “on the other hand” Apple is failing with the iPhone in China, the world’s largest handset market. Apple wants people to focus on its growth story, not on its growth challenges. The plan for Tuesday was that the tech wizard/cult leader in the mock black turtleneck would spin tantalizing visions of ubiquitous iPhones, new Mac mini laptops and Apple’s plans for online movie rentals. Everything seemed to be in place (I tried to short Netflix in anticipation of all this and was told uh-uh by Ameritrade—apparently I was not the first guy with that idea!). But now there is a problem. Now people will be wondering how to discount Apple’s stock given this China news. Yo, Steve, the iPhone is cool and all (I own one), but it is, um, rather consequential that Apple is failing to crack the world’s largest handset market and doesn’t seem to be getting along with the world’s largest mobile carrier! Steve, on this point, I gotta say ni zhen yuchun (really foolish)!
3. Ultimately, assuming Apple gets the iPhone into China, not getting a slice of China Mobile’s iPhone revenues is probably not that big a deal. I mean, twenty percent of carrier revenues in China for ONE LUXURY PHONE wouldn’t be THAT much. The iPhone probably will sell well as a luxury item in China, but obviously it is not going to be a mass market product there. It’s just too expensive. Moreover, airtime and data plans in China are comparatively cheap (I had one for my Palm Treo when I lived in Beijing), plus in China they DON’T require customers to agree to long-term, expensive-to-cancel contracts (a beautiful thing indeed), and a lot of China Mobile’s 350 million customers are buying pay-as-you go service (shenzhouxing ka) . . . so Apple was probably chasing fool’s gold here. They certainly seem to have misjudged their leverage (Did Apple really think China Mobile would say, “Yeah, Steve, great phone—where do we sign up to let you change our business model for 350+ million customers, of whom probably only a few million can afford or will want your device?).
4. Despite what I imagine to be its ultimately negligible financial impact, this news will likely depress Apple’s share price, at least somewhat, at least for a while. In fact, I imagine the drop in the stock price from this bad news will be larger than the gross potential revenue Apple thought it would get from China Mobile. (Reiterate above message to Steve—zhen yuchun).
5. This suggests to me that Apple just doesn’t get China. Apple has a negligible share of China’s market in every product category including MP3 players, and unlike Bill Gates I don’t think Steve Jobs has ever even been to China! Not having a good China strategy is like not having an internet strategy—very bad. Apple needs to fix this.

   I think Apple should be talking to distributors in China, not carriers. They need to sell the iPhone in the PRC as an unlocked, luxury item, not try to export to China the stupid American model of having carriers lock down phones just to that carrier (I detest this model generally, but it is especially galling when the carrier doesn’t subsidize the device, as is the case with the iPhone!). Even if Apple can impose that unfortunate model on some Europeans and us hapless Americans, what makes them think it will work in China, a developing country where the carriers are more insulated from competition, more entrenched in their current model, less impressed with Apple’s aura of coolness and understandably less optimistic about how much incremental growth they’ll get from selling iPhones.

   China Mobile is a vast company with, by Chinese standards, admirable customer service, but Apple can probably sell more phones in China if they get the iPhone into all the mom and pop stores (the literally counter-sized shops that are common in China). Guo Mei and Su Ning (the Best Buy/Circuit City cognates in China) collectively have modest market share—China’s handset distribution system is just highly fragmented and not carrier-driven, so Apple needs to adjust its model, not try to cram it down China Mobile’s throat.

   Plus, if iPhones in China will work with SIM cards from China Mobile, China Unicom or whomever, this approach will also hedge against the expected government reshuffling of carriers when it finally dolls out 3G licenses.

   (Could Apple not stop these unlocked iPhones from undercutting its sales of (unfortunately) locked iPhones in other countries by making the PRC ones work only in simplified Chinese?)

6. In terms of timing, I imagine China Mobile clearly understood Macworld was coming and realized that strengthened their hand in negotiating with Apple. Every book I’ve seen on negotiating in China mentions the savvy Chinese propensity to leverage such matters. Apple might have been pushing to get a deal signed for announcement at Macworld—if so, that idea clearly backfired.

Steve, as a shareholder and Apple fan (and former employee, actually), I suggest that you start spending some time in China, and go as a learner, not a teacher.

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Addendum: The Bloomberg story has been updated to include this erroneous line:

China Mobile’s shares fell 1.1 percent to HK$132.40 as of the 12:30 p.m. midday break in Hong Kong. Apple’s stock fell 3 percent to $5.33 in New York on Jan. 11.

Apple was trading above $170 in last week’s down market. I think the “to” is supposed to be an “or” to restate the percent decline in dollar terms. I hope the rest of the story is more accurate; otherwise I’ve really misspent my time inveighing!

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Addendum 2:

Bloomberg fixed the error. I, along with probably a hundred others, sent a note to the email address they provided at the end of the story. Wonder if that’s what triggered the update? The common retort to the Wikipedia slam that “anyone can edit” is that “everyone can instantly correct, too.” Seems MSM can also enjoy editing via the crowd. Anyway, they are now on update 3. Interesting to see the progression.