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Why iPhone Sales in China Are Stronger Than Apple Thinks

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Weak numbers don't mean the phone is a failure in the country.

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If I wasn't so in tune with news surrounding Apple (AAPL), I'd never have known that the iPhone launched in China last week. And no, it's not because sales were so weak I have yet to see a local Chinese person tapping away on the high-tech touch-screen phone. It's because I've seen hundreds of Chinese people with iPhones since the day I arrived in Shanghai months ago.

In Apple's eyes, the iPhone may have debuted last week. In reality, iPhones have been available to the Chinese, albeit illegally, for quite some time. Some venture down to Hong Kong to purchase one. Others bargain on the black market from vendors who either smuggle the phones across the border or purchase from a pick-pocketer (meaning mine is probably being resold as we speak).

George Hotz, the teen who first unlocked the iPhone back, may have been dubbed a genius back in 2007. Here, cyber markets are lined with technology wizzes that can unlock an illegal iPhone in no time, allowing US AT&T (T) devices to easily transition into China Mobile (CHL) and China Unicom (CHU) compatible phones. In other words, the iPhone is no stranger to the average Chinese (or at least Shanghainese) person.

On my daily commute to and from work, I can spot iPhone users up and down the metro train. And numerous co-workers have shown off their iPhones to me at work.

In response to the official opening sales, analysts are suggesting that China's market needs time and that the phone will eventually become a hit. Many are also speculating that the average person in China may just not be wealthy enough to purchase the high-priced phone. Clearly, these analysts have never been to China.

The weak sales this past week have absolutely nothing to do with the Chinese not being able to afford the iPhone. Consumers here are American-made obsessed. When it comes to brands, they'll pay premiums for literally any western label.

There's no shortage of cash and the phone is already a hit here -- just not on Apple's books under the "China region."

The problem is that there's no incentive for the Chinese to purchase legit iPhones. The phones being sold legally here don't have wi-fi capabilities (thanks to government control), cost more,and require customers to subscribe to an expensive China Unicom plan.

One of my co-workers said he paid roughly $500 for his iPhone on the black market and pays no more than $15 a month for his pre-paid China Mobile phone minutes, a concept the Chinese are more familiar with. China Unicom is selling the iPhone starting at $730 tied to a data plan can cost up to $250 per month, with no wi-fi.

The good news for Apple is that it's not technically losing out on the black market sales here in China. The company is still earning revenue from the initial sale of the phone. What it's missing out on is the additional revenue generated from the contract it has with China Unicom. Given the shear number of iPhone users in China, the small stipend it receives from the carrier could translate into a notable amount of lost revenue.

The bottom line is that iPhone sales recorded as Chinese revenue on Apple's financials will remain weak. But that doesn't mean the phone is a failure in the country. The Chinese have become accustomed to buying iPhones illegally. And according to my local co-worker who's an iPhone owner, that trend isn't likely to reverse anytime soon.
Position in AAPL.
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