Now that Apple (AAPL) has finally reached a deal to sell iPhones to customers of China Mobile (CHL), the question is now how many Apple products the network’s user base will buy. Wall Street clearly expects the number to be pretty high: Apple’s stock is up about 1 percent on the news.
For Apple, worries about China have been central all year. The iPhone currently accounts for about 5.8 percent of the Chinese smartphone market, down from 10 percent in the second quarter of last year, according to data from IDC and Bloomberg Industries. The low-priced iPhone 5C was widely seen as a way to reverse that decline, but many analysts were disappointed that Apple didn’t price it significantly lower.
China Mobile needed a deal with Apple, because the lack of iPhones meant it was losing customers to rival networks. With the world’s largest carrier now offering the iPhone, Apple has access to an enormous new market. China Mobile has about 759 million customers, though most analysts say the number of new iPhone users won’t be anywhere near that even if everything goes perfectly.
The relevant size of the China Mobile consumer base is the 176 million users on its 3G network. Apple has designed versions of the iPhone that will work both on this network and China Mobile’s developing LTE network.
Also, the price of the iPhone puts it out of reach for almost all Chinese phone users. The best-selling smartphones in the country are lower-priced Android devices from Samsung Elelctronics (005930:KS) and Chinese companies, and the mere availability of the iPhone won’t change that. ”Perhaps 100 million Chinese people can afford premium products such as the iPhone,” Benedict Evans of Enders Analysis told Bloomberg News in an e-mail.
How many sales would this translate to? According to Bloomberg Industries, Apple would sell 18.1 million phones next year if China Mobile’s 3G customers adopt the iPhone at the same level as those from China Telecom (CHA) and China Unicom (CHU), which have deals with Apple in place. But analysts think that level of adoption is unlikely.
Last week, Morgan Stanley (MS) analyst Katy Huberty estimated that, based on a survey of consumers in Chinese cities, Apple would sell 12 million iPhones, although she also said that total sales could be as low as 5 million or as high as 23 million. Toni Sacconaghi at Sanford C. Bernstein looked at adoption of iPhones on Verizon Wireless’s network after it added the iPhone and estimated that Apple would sell 15 million additional iPhones on China Mobile’s network. This would peg Apple’s share of the high-end market in China at about 60 percent.
Apple sold 150 million iPhones in the 12 months ended in September, so the middle range of these estimates means China Mobile could instantly account for roughly 10 percent of total iPhone sales. Sacconaghi estimates that the deal would mean $9 billion in incremental revenue for Apple and $3 in incremental earnings per share. This move hardly means that Apple will conquer China. But even a relatively small slice of such an enormous market is huge.