Apple Reaches China Mobile Deal for IPhone in Biggest Market

Dec 23, 2013 4:12 pm ET

(Updates shares in fifth paragraph.)

Dec. 23 (Bloomberg) -- Apple Inc., ending six years of negotiations, struck a deal to sell the iPhone through China Mobile Ltd., giving both companies a means to fight declining share in the market of 1.2 billion wireless subscribers.

China Mobile will sell the iPhone 5s and 5c models in its retail stores starting Jan. 17, the companies said in a statement that provided no financial terms. The phones for China Mobile’s network will also be available in Apple’s retail stores in China under the multiyear accord.

The agreement means Apple now has access to all carriers in the world’s biggest handset market, where Samsung Electronics Co. leads and smartphones using Google Inc.’s Android operating system dominate sales. For China Mobile, which has 763 million users, the deal may help draw high-end subscribers to its new fourth-generation network while the company faces its first annual profit decline in more than a decade.

“The China Mobile deal will significantly help Apple’s position in China,” Bryan Wang, principal analyst and country manager in China for Forrester Research, said today. “China Mobile will use the iPhone to win back some high-end subscribers who chose to defect to other carriers because of the iPhone.”

Apple rose 3.8 percent to $570.09 at the close in New York. Shares of China Mobile rose 0.8 percent to HK$80.55 in Hong Kong, paring this year’s decline to 11 percent.

New Sales

China Mobile may add 12 million new iPhone sales for Apple in 2014, Katy Huberty, an analyst at Morgan Stanley, wrote in a Dec. 16 report. The company sold 150 million all of last year.

Pre-registration for China Mobile will start Dec. 25 with pricing and availability to be announced at a later date, according to the statement. Apple declined to comment further.

China Unicom (Hong Kong) Ltd., the nation’s second-largest carrier, began offering the iPhone in November 2009 and third- ranked China Telecom Corp. followed in March 2012.

“It’s the last big gap in distribution” for the iPhone, Benedict Evans, an analyst at Enders Analysis in London, said after the announcement.

China Mobile had 62 percent of China’s total mobile subscribers at the end of October, down from 64 percent a year earlier and 67 percent at the same time in 2011, according to company data.

Samsung Leads

“IPhone still matters a lot for high-end customers,” Tucker Grinnan, a Hong Kong-based analyst at HSBC Holdings Plc, said by phone before the announcement. “One of the main reasons China Mobile is in the position that it is today, in terms of growing revenue at a much slower pace than its competitors, is because they have been waiting for an iPhone deal.”

Samsung led the China market in the third quarter, followed by Lenovo Group Ltd., China Wireless Technologies Ltd., and Huawei Technologies Co., according to Canalys, a technology research company. Other homegrown phone makers such as Xiaomi Corp. are also gaining traction.

Cupertino, California-based Apple ranked fifth with 6 percent of China’s market during the third quarter, Canalys said in November.

Apple’s potential customer pool in China is limited by the cost of the iPhone, which is more than the equivalent of $700. Most buyers in China also don’t get the discounts and subsidies that customers in the U.S. enjoy.

Market Saturation

“Perhaps 100 million Chinese people can afford premium products such as the iPhone,” Evans of Enders Analysis wrote in an e-mail. “Important to note this isn’t quite 750 million new customers.”

Apple is seeking new users amid signs of saturation in the market for high-end handsets. Chief Executive Officer Tim Cook is under pressure to reignite growth and maintain the margins of the world’s most valuable technology company. Apple’s stock has risen 7.1 percent this year, compared with a 28 percent gain in the Standard & Poor’s 500 Index.

China Mobile first said it was in talks to release the iPhone in November 2007, the same year Apple began selling the device. In 2010, Wang Jianzhou, China Mobile’s chairman at the time, met Steve Jobs, Apple’s then-CEO. Discussions continued this year, with two meetings in Beijing between China Mobile Chairman Xi Guohua and Apple’s Cook.

Homegrown Network

In September, NTT Docomo Inc., Japan’s largest carrier, ended its holdout against the iPhone. Reliance Communications Ltd., India’s third-largest operator by market value, began offering iPhone contracts in November.

One hurdle to an agreement had been China Mobile’s homegrown third-generation network standard, which hasn’t been adopted by any other carriers globally, and which Apple had been reluctant to support. On Dec. 4, China Mobile was awarded a license to begin commercial 4G service using the TD-LTE network standard.

The iPhones will work on the 3G as well as the new 4G networks, the companies said today.

China Mobile had also pushed Apple for a favorable business model to offer the iPhone. Apple had to be willing to discuss “benefit sharing,” China Mobile Chief Executive Officer Li Yue said in December 2012.

Lower Earnings

China Mobile was trying to avoid the experience of China Telecom, which reported a 10 percent drop in net income in its first year of offering the device due to higher subsidies.

Even without the iPhone, China Mobile’s handset subsidies, which hit 14.2 billion yuan ($2.3 billion) in the first half, and costs for the rollout of 4G services are choking profit growth. The company this year is projected to report its first decline in annual profit since 1999, with net income to drop 2 percent to 126.1 billion yuan, according to the average of 23 analyst estimates compiled by Bloomberg.

In October, Apple forecast gross margins that missed analysts’ projections amid higher costs to introduce new devices ahead of the holiday shopping season. The company expects revenue in the quarter ending December to be $55 billion to $58 billion, its first single-digit sales increase for the holiday period since 2008.

--Edmond Lococo and Adam Satariano. Editors: Robert Fenner, Lena Lee