Why China Mobile isn't right for Apple and the iPhone

IDG News Service — Thu, 04 Sep 2008 12:08:36 -0700

Apple's discussions with China Mobile about bringing the popular handset to the world's largest mobile market is the stuff of tech journalists' dreams. The potential deal would join together the world's largest mobile service provider with the planet's most talked-about phone. Both companies are tight-lipped, offering us nothing more than confirmations of the talks and statements that indicate that the two sides want to make a deal.

With no deal, no timetable and ultimately no pressure on either side to come to an agreement, there's a lot of room in between for speculation. So here's my contribution: Apple is negotiating with the wrong potential partner for the iPhone in China.

The biggest issue for the two companies is China Mobile's choice of homegrown TD-SCDMA (Time Division Synchronous Code Division Multiple Access) as its 3G (third generation telephony) standard. That standard is incompatible with the other two main 3G systems, WCDMA (Wideband Code Division Multiple Access) and CDMA2000. Therefore, in order to launch the 3G iPhone in China, it would need to make either a TD-SCDMA handset, or one that can handle multiple 3G standards.

That technical issue is aside from the corporate culture of the two companies being totally different. Apple is an innovator, a marketing machine and a category killer in portable music players. China Mobile is not a category killer, but a category owner. Although it is not a monopoly player, it might as well be. A shake-up of China's telecom sector is creating an additional new competitor to China Mobile, but China Unicom, the only other current mobile service provider, competes on price, not service. China Mobile does a satisfactory job for its 400 million-plus customers but it doesn't need to try harder.

China Mobile has also rejected Apple's revenue-sharing demands. As observer and consultant David Wolf noted when the first round of talks broke off in January, "The parties walked away from the table because they don't really need each other to succeed." It would be nice for Apple to sell the iPhone in China, but it doesn't need to do so to be successful. China Mobile has lots of phones to sell. Even if you take into account the estimated 800,000 smuggled iPhones now in use in China, that accounts for less than 1 percent of all the handsets here. No iPhone to sell? No tears from China Mobile.

However, in China's telecom sector shuffle lies what could be a very nice solution for Apple. Duncan Clark, chairman of Beijing telecom consultancy and research firm BDA China said at the July 19 opening of China's first Apple store that Apple's deal with AT&T Wireless was done with "a weaker carrier," which AT&T certainly is compared to China Mobile. But why then wouldn't Apple want to go to a carrier in China that is similarly weak and would therefore offer better terms?

China is reorganzing its telecom players into three major companies, all of which will offer both mobile and fixed-line services: China Mobile, China Telecom and China Unicom.

China Unicom begins life as a combined mobile and fixed-line provider with about 130 million [m] mobile subscribers; China Telecom is doing the same with zero mobile customers. Aside from desperation to compete with and differentiate themselves from the world's number one and local incumbent, these two companies are have an advantage that should be very attractive to Apple: they will be using global 3G standards for their services.

Although China Mobile's roll-out of TD-SCDMA will give that format a big boost, Unicom and Telecom may be able to attract more globally-minded users -- those who will want to take their 3G handsets and services with them when they go abroad for business and pleasure. Unicom WCDMA trials are already underway, and Telecom looks set to use CDMA2000.

Why would Apple deal with monolithic China Mobile, when it could use global standard technology and probably extract revenue-sharing terms from one of the more nimble new players? Although having China Mobile as a partner might have some advantages for Apple, such as sheer size and marketing might, it has generally chosen smaller operators in most of the international markets it has entered. If that approach has worked elsewhere, then why not in China also?

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