Why launching a cheaper iPhone would be good news for China, but bad news for the rest of the world

Pyramid Research on Apple's next steps

Why launching a cheaper iPhone would be good news for China, but bad news for the rest of the world
Apple's plans to make an impact on the Chinese mobile market will only be realised if the firm either launches a cheaper iPhone, or gets into bed with the region's dominant carrier China Mobile.

That's according to Pyramid Research, which – in a note published on the firm's website – claims taking the former route could damage Apple's standing with western consumers.

Nonetheless, Pyramid claims Apple CEO Tim Cook's declaration that China will one day overtake the US is currently some way off being realised, with Google's Android standing as the region's primary player.

Fork in the road

"iPhone has not been able to effectively tap the mass market for two reasons," details Pyramid's associate analyst Guillermo Hurtado in the note.

"First, the iPhone is too expensive for the average Chinese consumer. While the smartphone average selling price in China stood at $204 in 2012, all iPhone models are currently priced above $400.

"Second, Apple has not been able to finalize a deal with government-owned operator China Mobile, which as of the end of 2012 had more than 717 million mobile subscriptions, making it by far the largest operator in the country.

"As a result, the mobile operator has been losing market share to China Telecom and China Unicom, which do carry the iPhone."

Pyramid claims that the logical solution, then, is to address one of these two problems: launch a cheaper iPhone, or partner up with China Mobile.


Both options present problems all of their own, however.

As Pyramid notes, revenue sharing disagreements have reportedly "held back China Mobile from carrying the iPhone."

Any deal with China Mobile, therefore, would require Apple to hand over a greater share of its revenue – a deal that, if agreed, could trigger renegotiations with operators across the globe keen for a greater slice of the iPhone pie.

Nevertheless, if it could be agreed, Pyramid estimates iPhone would be able to reach a forecasted 4G base of 103 million consumers on the back of a compound annual growth rate (CAGR) of 33 percent between 2013 and 2017, helping to push China past the US for Apple by 2015.

Launching a cheaper iPhone would also boost Apple's sales – Pyramid predicting a CAGR of 30 percent – but risks both cannibalising sales of existing models, and damaging iPhone's appeal to consumers who see it as a premium offering.

State intervention?

"This move can be rocky because it can lead to cannibalisation of sales of its existing iPhone line and destroy the aura of exclusivity around its products," notes Hurtado.

Could, then, the Chinese Government come to Apple's rescue? Pyramid suggests officials are less than happy with Android's dominance of the Chinese mobile market, and may seek to shift the balance of power.

"In a recent report, the China Ministry of Industry and Information Technology expressed its concerns regarding the country’s dependency on Google’s Android operating system, which captured close to 71 percent of the smartphone market in 2012," concludes Hurtado.

"Any action the government might take to address this overdependence will most likely end up greatly benefiting local smartphone vendors and, to a lesser extent, Apple."

[source: Pyramid Research]

With a fine eye for detail, Keith Andrew is fuelled by strong coffee, Kylie Minogue and the shapely curve of a san serif font.