“Both sides sounded keen,” China Mobile’s chairman Xi Gouhua said today after releasing first half earnings (paywall). Xi was referring to Apple and his company, which are in talks for China Mobile to offer iPhones to its subscribers. Apple CEO Tim Cook met Xi in Beijing last month, to discuss “cooperation.”
Both sides have plenty of reasons to be keen. China Mobile has 740 million subscribers, or two out of every three Chinese mobile users, making it the world’s largest mobile carrier. But less than a fifth of its subscribers have signed up for 3G data plans, which offer faster data connections and bring in much greater revenue per user for carriers. Already data accounts for a third of China Mobile’s revenues. Yet it lags behind its smaller rivals: more than a third of China Unicom’s subscribers have a 3G plan while half of China Telecom’s do. If it offered the iPhone, it would undoubtedly see an uptick in 3G numbers. That’s especially important at a time when voice and SMS revenues are eroding thanks to online services such as WeChat.
As for Apple, there are reasons beyond the obvious attractions of getting the world’s largest operator to offer its devices in the iPhone’s second-largest market. In its second-quarter earnings release, Apple said its overall revenue slumped by 43% in the Greater China region, which includes Taiwan and Hong Kong. Apple’s share of China’s smartphone market has fallen to below 5% from 9% in the first quarter of this year, according to Canalys, a research firm. It stood at 13% in Q1 last year, according to Strategy Analytics. The pace of decline in market share is increasing.
A deal with a carrier that gives Apple a big bump in iPhone sales would help its market share, revenue and no doubt its self-esteem. One estimate pegs the number of potential customers on China Mobile’s network at a whopping 40 million. Compare that to the total of 136 million iPhones Apple sold globally sold in 2012.
That puts China Mobile in a strong position to bargain with Apple for a better deal than other carriers, which must guarantee a minimum number of orders. Those deals are expensive for the cellular companies. Both China Telecom and China Unicom have seen profits slip on the cost of subsidizing handsets. China Mobile exceeded analyst expectations with its earnings today but is struggling with high operational costs from investment in new equipment and—you guess it—handset subsidies. Analysts are already predicting China Mobile’s first annual profit decline in 14 years.
Looking at the long term though, the timing couldn’t be better for a tie-up between Apple and China Mobile. One of the reasons that the Californian firm and the Chinese carrier haven’t been able to agree on a deal so far is that Apple’s hardware was incompatible with China Mobile’s network. That problem could be solved on Sept. 10, when rumors suggest Apple will introduce new models using compatible CDMA technology. That same product launch could also see the release of Apple’s “cheap” iPhone, expected to be priced at between $250-$350. Taking into account carrier subsidies, it is conceivable that the device could take on Xiaomi’s low-cost, high-performance devices, some of which go for as little as $130.
Another reason Chinese consumers may rush out to get data plans is that China Mobile is building an LTE network (LTE stands for long-term evolution; LTE networks are a successor to 3G), which it will probably roll out by the end of the year. All those people without smartphones could potentially leapfrog straight ahead to super fast mobile broadband on shiny new Apple devices. Looked at that way, China Mobile’s disadvantages—its low subscriber base for data and lack of iPhone support—may turn out to be just what drives growth in the coming years.