Part 1 of our interview with iPhonAsia.com’s Dan Butterfield.
Its been almost 6 months since China officially launched the iPhone. So how’s it going?
We recently sat down for a fascinating and insightful chat with iPhonAsia.com editor Dan Butterfield, on the current market in China for the iPhone and Apple’s expansion into China – whcih includes an astounding 24 Apple Stores planned for 2010.
Dan’s background started in financial services for the telecom industry focusing on Asia, and has now dedicated his time to being an online evangelist promoting a company he not only loves but who is also a shareholder of (disclosure).
We covered a lot of ground so we’re going to break this interview into 2 installments, with part 2 being published tomorrow. So lets get into it:
We thought we were iPhanatics, but you have a whole blog talking about iPhone and specifically in China, Where/How/Who did iPhonAsia.com start?
iPhonAsia grew out of my ownership in Apple stock. I have always been enamored with Apple’s products, and believed in their mobile strategy and ability to execute. I built a core position in AAPL not long after the first iPod launched.
In late 2007 there was tremendous media speculation over iPhone in Asia and how/when Apple might enter China, Japan and Korea. There were also many press reports that omitted or miss-reported important facts about iPhone’s entry into China.
For example, journalists often did not understand the politics in China’s telecom industry and the dynamics of the tumultuous telecom industry restructuring that played out from 2007 to the present day. I often shared background information with fellow Apple shareholders and this was the genesis of iPhonAsia.com (launched in January 2008). My aim has been to dig a bit deeper and provide pertinent information to AAPL investors and Apple/iPhone fans. Instead of focusing on dry financials, I thought it would be more interesting for readers if I blogged on iPhone and mobile telecom in Asia.
What do you think is the real reason behind the teeter-tottering of China Mobile bringing in the iPhone?
Preface: Before I continue, I should emphasize that many of my responses in this interview are based on flat out guesswork. Apple rarely comments publicly and details are kept under wraps … hence crystal-ball gazing is often all I’m left with.
The Apple/China Mobile relationship (never ending “talks”) is a long and winding tale. One dynamic at play is the fact that Apple and China Mobile are both hugely successful and well-financed companies who have something special to offer (Apple has revolutionary products/platform and China Mobile has 500 million subscribers) and neither wants to capitulate to the other. The primary impediments to a deal include:
- Apple’s reluctance to build a “single-carrier” (can’t be deployed elsewhere) iPhone – a virtually necessity to support China Mobile’s TDSCDMA 3G.
- Apple’s strong resistance to any customization that would support a non-Apple platform (albeit compromises were made for China Unicom).
- China Mobile and Apple’s “competing” desire to control wireless value-added services (WVAS) revenues – e.g. music, apps/games, ringtones, messaging, cloud storage services, etc.. Apple has iTunes/App Store and China Mobile wants its Monternet and Mobile Market.
- Apple’s reluctance to simply rollover and take China Mobile’s deal terms. I’m sure China Mobile sees things the exact opposite way (i.e. “we won’t roll over and concede to Apple”).
- China Mobile’s big bet on Android and OPhones. NOTE: OPhones are TDSCDMA 3G handsets, built by various manufacturers, running China Mobile’s Open Mobile System, an Android-based OS customized to support China Mobile’s WVAS.
Despite the impediments listed above, I believe Apple and China Mobile will ultimately come to terms. The reasons why a deal will eventually get done include:
- Apple wants to offer iPhone to China Mobile’s truly massive subscriber base (nearly 500 million mobile customers).
- China Mobile’s OPhone offerings have thus far underwhelmed and have failed to capture a large volume of new TDSCDMA 3G subscribers. China Mobile needs a showstopper smartphone.
- iPhone remains quite popular and China Mobile recognizes that iPhone demand will accelerate when price-points drop.
China Mobile won’t publicly admit as much, but I suspect they are concerned that a new “fourth generation” China Unicom (Apple) iPhone, rumored to be launching later this summer, will be very attractive to highly valued on-contract subscribers. China Mobile is already suffering leakage of grey-market iPhone subscribers who are “upgrading” to China Unicom’s faster WCDMA 3G network. Grey-market iPhone owners had heretofore been using their real (but illicitly obtained) iPhones on China Mobile’s EDGE 2G network.
If the rumored forthcoming iPhone 4G (fourth gen) for China Unicom includes the WAPI/WiFi combo, this could greatly accelerate iPhone adoption and put pressure on China Mobile to respond with an iPhone offering of their own. I have long postulated that an iPhone deal with China Mobile would most likely be for a low-priced iPhone 2G (EDGE). However, if China Mobile steps up and commits to a large pre-purchase (5 to 7 million units would be my guess), Apple might build a special model iPhone for China Mobile that includes a chipset supporting TDSCDMA + WAPI/WiFi.
There is no reason why Apple can’t potentially deliver both a low-price EDGE 2G model and a TD-SCDMA 3G iPhone, with the caveat being a large pre-purchase commitment in the case of the “TD” iPhone.
Apple already knows a low-price EDGE 2G model will sell, and it won’t be a single carrier iPhone. A low-priced (perhaps smaller in size) 2G iPhone can be a strong seller in many large pre-paid (no contract) markets beyond China (e.g. India, Brazil, Russia, Indonesia and throughout Southeast Asia).
For readers interested in more background, I recommend they read a March 2009 post Apple’s iPhone in China Negotiations.
What do you think about the speed of uptake of the iPhone in China?
Grey-market iPhone sales continue at a steady pace and by most accounts are outpacing the official (China Unicom) iPhone sales. WiFi capability and lack of high deposit requirements are the primary attractions of grey-market iPhones. By some estimates there are now some 2+ million iPhones (1.55 million grey-market + 450,000 official) in China. That’s impressive considering iPhones have only been legally available in China for a few months.
The uptake of the “official” China Unicom iPhone has been modest. The last leak from a China Unicom source (end of December 2009) revealed that about 300,000 official iPhones had sold since the October 30, 2009 launch. China Unicom has recently stepped up iPhone marketing and I expect the pace of sales has also bumped up. Just my guess, but I expect we have now passed 450,000 units in China. A pace of 90,000 iPhones per month might be considered a big hit in many world markets, yet this volume is likely below China Unicom’s targets. But no one is panicking. There is a second and third act to this play.
Why haven’t the “official” iPhone sales in China been greater? Two key reasons:
- Notwithstanding subsidy options, the deposit fee requires a substantial initial cash outlay that puts the iPhone out of reach for many potential buyers.
- No WiFi on the “official” iPhone – Grey-market iPhone sellers are waiving their WiFi-ready iPhones in the face of prospective buyers and touting lower price-points without the high deposit requirement.
I should emphasize that there are many benefits that come with the “official” iPhone, not the least of which are:
- Subsidized (discounted) price for those willing to go on contract.
- The deposit fee is high, but it’s rebated back (portion allocated back each month) and offsets your monthly plan costs.
- A real warranty.
- Ability to load iPhone OS software updates without any concern about “bricking” – a big issue for many jail-broken grey-market iPhones
- Many fun/cool “for China” apps are preloaded on the China Unicom iPhone.
Background on the first models built for China: Perhaps with a bit of encouragement from China’s Ministry of Industry and Information Technology (MIIT), China Unicom convinced Apple to build a special model for the China Market. This iPhone has a non-standard chipset without WiFi capability (WiFi removed at the hardware level) and many “for China” apps come pre-loaded on the iPhone + a link to Unicom’s Wo Portal. Apple almost certainly won concessions for this custom build. My guess is that the concessions were price (more expensive for China Unicom versus standard model iPhones) and a volume purchase commitment – rumored to be 5 million iPhones. I do not believe China Unicom paid for 5 million iPhones upfront, and nor do I believe the 5 million were to be allocated to just the two initial iPhone models built for China (model A1324 based on iPhone 3G and model A1325 based on iPhone 3GS). However, I do believe China Unicom has made a minimum purchase commitment to Apple and will ultimately deliver on their promise.
China Unicom can do several things to accelerate iPhone sales, and they’ve already undertaken key initiatives, including:
- Training their sales staff to most effectively sell iPhone.
- Undertaking a massive national iPhone marketing/advertising campaign (print, billboards, TV, etc.).
- Conducting a 46-city iPhone user experience road-show.
- Setting up a separate “official” iPhone Store on Taobao.com.
Yet, by far and away, the most important and direct means for China Unicom to stimulate sales would be to reduce the initial iPhone cash outlay (price/deposit).
Background on the deposit requirement: Because credit card use is relatively rare in China (and credit ratings are not a major concern to most Chinese consumers), there is a risk in subsidizing the iPhone purchase price. A new iPhone subscriber could sign-up for a more expensive “power-user” 2-year iPhone service contract– with the maximum calling minutes and data-usage, and thereby get a heavily subsidized (discounted) or even “free” iPhone. This same customer could later walk away from the contract with his/her new iPhone (“come find me”) without making the required monthly payments.
In the West, many consumers are motivated to make timely payments to avoid a poor credit score. But consumers in China don’t buy on credit so “who cares” about damaged credit? Obviously, China Unicom, the party at risk (subsidizing iPhone), cares. Consequently, China Unicom has opted to require an upfront deposit. This deposit is rebated back to subscribers (an equal portion each month) over the life of the 2-year cellular service contract.
There may be ways to reduce the high deposit requirement. In Hong Kong, via Hutchison “3,” there are several iPhone plan options (e.g. the DBS ComPass Visa) that allow subscribers to forego the upfront deposit. Perhaps China Unicom will look to adopt a similar program for subscribers in the People’s Republic of China?
I believe that Apple and China Unicom are now cooperating on multiple ways/means to offer the forthcoming “next generation” iPhone model(s) at competitive price-points. Look for China Unicom to get more aggressive on iPhone pricing later this summer. There is powerful iPhone price elasticity in China and a lower price (and/or elimination of high deposit requirements) could generate substantially higher sales.
We have all heard about what a typical worker in China gets paid, so just who are these people buying this expensive phone?
On my recent travels through China I was amazed to encounter so many seemingly “income-challenged” youth who found a way to afford a “real” (not Shanzhai) iPhone. While incomes are lower in China relative to the West, household savings rates are high. Rainy day money can sometimes be spent on items that deliver both utility and status. An iPhone is often the family’s means to connect with the outside world – surf the Net, text/e-mail, read news, watch videos, use GPS/maps, use social media and have fun with games/apps, etc. iPhone has a value far beyond a throwaway Shanzhai cellphone.
Of course, many in China have no problem affording an iPhone. There are an estimated 340,000 millionaires in China and there is also a growing middle-class. An estimated 290 million Chinese households can be classified as middle-to-upper class with monthly incomes ranging from RMB5,000 to RMB15,000 (US$732 to $2,196).
Join us tomorrow as we continue with our interview with Dan Butterfield as we look at WiFi, popular apps, Android as a threat and the Apple retail takeover expansion into China. Feel free to post comments and questions below and we’ll do a follow-up interview with Dan later.