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Apple Inc.'s China Deal May Not Be a Slam Dunk


Despite netting 763 million new subscribers, Apple's deal with China Mobile is a few years too late.

For the tiny fraction of the population that actually celebrates the holiday, Christmas seemed to have come a few days early this year in China.

In a massive partnership that nets the company 763 million new subscribers, Apple (NASDAQ:AAPL) announced a deal with China Mobile (NYSE: CHL) that allows for the sale of the iPhone 5S and iPhone 5C to its customers. Starting January 17, the best-selling devices will be available on the world's largest wireless network.

In a press statement, Apple CEO Tim Cook underscored the significance of the deal. "China is an extremely important market for Apple, and our partnership with China Mobile presents us the opportunity to bring iPhone to the customers of the world's largest network."

Although nobody denies that this is a win for both Apple and China, analysts are reticent to declare it a massive slam dunk for either company -- or at least not as huge or lucrative a deal as it could've been.

Estimates for potential sales in 2014 vary wildly, with Global Equities Research pegging it around 15 to 20 million and Mizuho Securities highballing it at 70 million. However, when considering the most ideal time frame in which to launch this type of deal, experts agree that this comes a few years too late.

Already, millions of Chinese residents own Apple products, many of which are already on China Mobile -- 10 million, according to estimates. Subscribers either purchased their devices from Apple Stores in China or on the black market and simply used their device for calls using their China Mobile SIM card. Yes, that would mean that they could never access the carrier's network for data, which this deal allows them to do, but this is hardly a "grand debut" for the iPhone in China. For many, especially for those on competing providers like China Unicom and China Telecom who already sell the iPhone, it's old hat.

Another issue is cost. When the iPhone 5C was officially announced in September, many hoped it would finally usher in a low-cost Apple product for the budget-minded customer in emerging markets. Unfortunately, at $739 unsubsidized in China, the iPhone 5C was anything but a budget phone. (In fact, it wasn't that much of a discount from the iPhone 5S, which sold for $871.) Apple stated it would reveal the cost for China Mobile customers at a later date, but few expect a huge drop in price.

Usha Haley, a business professor at West Virginia University and the author of the China Tao of Business, told Forbes that shoppers in China will often forgo brand loyalty when it comes down to cost -- and that can be problematic for other countries looking to make inroads in the market.

"We have found US, European, and Australian companies that would enter China and sell at below market prices to establish a foothold," Haley said. "Then they would try to increase their prices just a tiny bit, but at that point their customers abandon them."

That's a bitter pill to swallow for Apple, a company that depends on brand image to sell its premium products.

Which brings us to another problem for Apple, one that also exists in the States: Google (NASDAQ:GOOG).

Android has made significant strides in recent years to claim a huge global market share. Thanks to heavy promotion and less expensive devices, the major Android player Samsung (OTCMKTS:SSNLF), for example, already has over 20% of the market in China. Android also benefits emerging markets by design and permits access to alternative app stores, so that even though the Google Play Store isn't officially available in China, users can still turn to many third-party applications to run on their devices. (Obviously, Apple's locked-down walled garden would never allow unapproved apps without a warranty-voiding jailbreak.)

And when you consider other Android manufacturers in China like Huawei, Coolpad, and ZTE offering up devices on the cheap -- not to mention the impressive performance and efficiency of today's mid-range phones -- there's no longer a pressing need for anyone to get an iPhone.

So while Apple and China Mobile may be -- pardon the pun -- gung-ho about this new deal, they're both about a half-decade late to the party.
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