After Tim Cook’s trip to China last week, rumors of an impending deal between tech-giant Apple (AAPL, quote) and telecom China Mobile (CHL, quote) have flooded the internet.
The iconic Apple store in Shanghai’s Pudong district
With discussions supposedly stalled over a number of issues, in order to reach an agreement, one side will likely have to compromise to ensure the completion of a deal. This begs the question: who needs who more?
Apple’s share price has faded over the past few months, so investors in the stock have been looking for a catalyst to power shares higher before earnings are released later this month. Many have looked to China to provide a boost. While the company’s iPhone 5 debuted to spectacular demand last month – despite some misinformation indicating otherwise – the product release did little for Apple’s stock.
As Cook arrived in China and met with the head of China Mobile, a new potential China-related catalyst emerged: a deal with China Mobile and its roughly 700 million subscribers could see Apple shares jump.
However, as I’ve argued before, drawing such conclusions is overly reductive. Although China Mobile has the largest mobile subscriber base in the world, Apple is unlikely to see but a small fraction of those sales.
The majority of China Mobile subscribers are on pay-as-you-go plans on “dumb phones.” These people are members of China’s lower and emerging middle classes, and at this point in time do not have anywhere near enough discretionary income to afford Apple wares.
Second, many Chinese customers aching for an Apple phone long ago fled to China Unicom (CHU, quote) and China Telecom (CHA, quote), both of which already offer the iPhone 5. Third, roughly 15 million iPhone users are already on the China Mobile network using unlocked phones and are unable to access the carrier’s 3G network.
The second and third point illustrate not only why the benefit of a China Mobile deal for Apple would be limited, but also why such an agreement would be more beneficial for China Mobile. The company is losing lucrative 3G market share to China Unicom and China Telecom. Even if the iPhone’s popularity fades in the future, customers that have already switched are unlikely to return to China Mobile, barring a sea change in the mobile phone landscape.
As well, Apple would not see its customer base broaden substantially by having existing iPhone customers on China Mobile’s network obtain formal access to the 3G and 4G services. On the other hand, China Mobile would benefit from having an additional 15 million subscribers paying for more lucrative 3G/4G services.
So while Apple would certainly see some new customers as a result of a deal with China Mobile, it’s increasingly evident that such a deal would be more beneficial to China Mobile. As a result, look for China Mobile to potentially back down from its revenue sharing demands in negotiations with Apple and see a deal done sooner rather than later.
While Apple shares may pop on the deal, don’t expect the addition of China Mobile to the iPhone family alone to result in a drastic increase in China sales. Apple’s popularity in China continues to surge and it continues to be a growth story going forward; this reason, and not a China Mobile deal, is Apple’s China catalyst.
Disclosure: Author is long AAPL; family is long CHL