Sept. 5 (Bloomberg) -- Apple Inc. is accustomed to dictating terms to carriers for its iPhone. As it seeks a deal with China Mobile Ltd. to sell the handsets, it’s the operator that is in command.
After being surpassed in the world’s largest smartphone market by Samsung Electronics Co. and five Chinese companies, Apple needs an agreement with the carrier.
Apple is expected to introduce an updated iPhone on Sept. 10, and there’s rising speculation it will offer a low-cost handset. That would help seal a deal with China Mobile, which has 63 percent of the country’s 1.19 billion wireless accounts.
“In this relationship, China Mobile has all of the power,” said Edward Zabitsky, chief executive officer of Toronto-based ACI Research. “China Mobile will offer the iPhone as soon as Apple gives in on price.”
The iPhone 5 ranges from 5,288 yuan ($864) to 6,888 yuan in China, about double the price of the K900 IdeaPhone, the flagship product by Lenovo Group Ltd., the No. 2 seller of smartphones in China after Samsung.
“Apple’s unwillingness to provide meaningful concessions and China Mobile’s unwillingness to subsidize a high-cost device have inhibited a deal until now,” said John Bright, an analyst at Avondale Partners LLC. “A lower-cost iPhone, financially accessible to a greater proportion of China Mobile’s customer base, could be a middle ground.”
Apple may also be forced to concede App Store revenue to reach an agreement, according to Tucker Grinnan with HSBC in Hong Kong, whose ratings on China telecom stocks produced the best relative returns over the past year among 34 analysts tracked by Bloomberg.
“China Mobile certainly believes they should be able to get a part of the content pie,” Grinnan said. “Apple is going to have to be a bit more flexible on how they approach that.”
The shift marks a stark change from two years ago, when Apple released the iPhone 4 in China. The device wasn’t compatible with China Mobile’s 3G network, which uses a homegrown technology standard. To avoid losing its best customers to China Unicom (Hong Kong) Ltd., Apple’s original iPhone partner in the country, China Mobile gave gift cards valued at as much as $441 to iPhone users and built a Wi-Fi network so they could surf the Web while making voice calls on the carrier’s older 2G network.
Talks between the two sides have carried on for years. China Mobile’s then-Chairman Wang Jianzhou said in 2010 he had met Apple’s Steve Jobs to discuss iPhone cooperation. A year later, Wang said the two sides were seeking close collaboration and that he’d gotten “a positive answer” that Apple would supply an iPhone once the carrier introduced 4G service. China Mobile is conducting trials of a 4G network.
Since Wang’s retirement in 2012, new management has taken a harder line toward Apple. CEO Li Yue in December said Apple must discuss “the business model and benefit sharing.” Since then, Apple CEO Tim Cook has traveled to Beijing twice for talks with China Mobile.
China Mobile declined to offer an update on those talks. Apple will hold a press conference in Beijing on Sept. 11, according to an e-mail invitation from the company. Spokeswoman Carolyn Wu declined to elaborate on the event or talks with China Mobile.
Keeping devices affordable is critical for China Mobile, which serves hundreds of millions of poor rural subscribers, said Janice Chong, an equity analyst with Standard & Poor’s in Singapore.
“Proliferation of sub-1,000 yuan smartphones has been driving much of the 3G momentum in the past year,” Chong said.
China Mobile’s embrace of those devices has helped propel domestic brands like Lenovo, ZTE Corp. and Huawei Technologies Co. into the top ranks of global vendors.
The carrier must hold the line on iPhone subsidies as costs to attract users to its 3G service and to build out the new 4G network have the carrier on pace to report its first annual decline in net income since 1999. China Mobile is down 5.9 percent this year, compared with a 0.3 percent drop in the benchmark Hang Seng Index.
Subsidies on 3G handsets hit 14.2 billion yuan in the first half of this year, China Mobile said last month. The carrier’s capital spending will rise 49 percent to 190 billion yuan this year to support 4G, the company said in March. As a result, net income is projected to drop 1 percent to 128 billion yuan this year, the average of 23 analyst estimates in a survey by Bloomberg.
Still, few doubt that China Mobile will eventually offer the device.
“China Mobile’s size and Apple’s recent slowdown in growth position the operator well in any negotiations,” said Walter Piecyk, an analyst with BTIG LLC in New York. “But the iPhone is a difficult product for any wireless operator to ignore.”
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