Apple’s China Mobile Deal May Only Be A Matter Of Time; Could Add Billions In Value

In an apparent blow to hopes that China Mobile (NYSE:CHL) would soon be launching Apple’s (NASDAQ:AAPL) iPhone on its 4G network, the carrier’s chairman Xi Guohua said that the companies are still in talks and he has no new announcement to make on that front. ^[1] The comments came amid growing speculation that the companies have come to an agreement, fueled by the Wall Street Journal’s report earlier this month that the deal would be unveiled on December 18. ^[2] China Mobile has since gone on to officially launch its 4G service on December 18 as planned, and signed on handset manufacturers such as Samsung (PINK:SSNLF), Sony, Lenovo, HTC and Huawei to provide handsets compatible with its new network.

While Apple was conspicuously absent at the global partner conference which China Mobile hosted to launch its 4G brand, a deal between the two companies seems more a matter of when than if. According to the WSJ, some of the carrier’s local units in Beijing, Shanghai and Suzhou have advertised the iPhone on their respective websites and are accepting pre-orders for the device. ^[3] It could therefore be just a case of China Mobile choosing to leave the iPhone announcement for later so that other hardware partners are appropriately incentivized to build more handsets for its 4G network. Also, Apple could be holding off the launch until China Mobile’s 4G service is available more widely. Currently, the carrier has limited 4G coverage with only 16 cities expected to have 4G by the end of the year.

Our $600 price estimate for Apple, is about 10% ahead of the current market price.

See our complete analysis of Apple here

Huge Untapped Potential In China Mobile

A China Mobile deal is very important for Apple to ward off growing competition from Android manufacturers in emerging markets. It would open up a huge subscriber base of 750 million that has largely remained untapped in the absence of iPhone subsidies. Currently, Apple has subsidy arrangements with China Unicom and China Telecom, which together account for only about 35% of China’s wireless subscriber base. With the smartphone market in developed countries increasingly getting saturated, China Mobile will give Apple greater reach in an emerging market that has already leapfrogged the U.S. as the largest smartphone market in the world, and yet has a lot of steam left due to its low 3G penetration. China Mobile currently has less than a quarter of its total subscriber base on 3G.

What also makes China Mobile more lucrative from Apple’s point of view is its relatively more affluent subscriber base. Despite lagging in 3G subscriber mix, China Mobile has a mobile ARPU that exceeds the other two carriers’ by $3, or about 45%. Given Apple’s premium price point and the general lack of upfront subsidies in China, we expect the iPhone to be more successful on China Mobile than it has been on the other two carriers so far. Therefore, it will be interesting to see if Apple offers some sort of a concession either in subsidies or any other form to mitigate China Mobile’s subsidy concerns.

Taking into account the historical take rate of unsubsidized iPhones on China Mobile and the likely scenario of the cheaper versions of the iPhone being more popular than the high-end in China, we believe a China Mobile deal could add about $45 billion to Apple’s value (see Imminent China Mobile Deal Could Add $45 Billion To Apple’s Value). Our assumptions are contingent on China Mobile actually leading the 3G/4G race in the same way as it has dominated 2G. However, if China Mobile is unable to leverage its affluent subscriber base and the huge market share lead in 2G and turn it into a 3G/4G advantage, that scenario may not play out. Having China Unicom and China Telecom in the bag may help Apple cover a bit of lost opportunity in China Mobile, but for the China story to play out, its largest wireless carrier must deliver.

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1. China Mobile chairman says still in talks with Apple on iPhone deal, Reuters, December 18th, 2013 [↩]
2. China Mobile to Accept iPhone Orders This Week, WSJ, December 9th, 2013 [↩]
3. China Mobile Coy on iPhone Launch Timetable, WSJ, December 18th, 2013 [↩]