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iPhone Heads to China, Big Strategy Shift?

Tablet? They don't need no stinkin' tablet. Apple has just closed on its next mighty growth engine ... which happens to be the same one it's been riding. China Unicom has signed a three-year deal to sell the iPhone to China's estimated 600 plus million cell phone subscribers. Right, not potential subscribers. Actual. But digging into the numbers suggests that Apple has been at least flirting with a significant change in its corporate strategy.

Those subscribers split between two carriers. China Unicom reported 141 million GSM customers in July 2009. But that's tiny compared to China Mobile's nearly 498 million. It's inconceivable that Apple wasn't talking to both companies at some point, so the question is why go with the smaller.

  • Being smaller, China Unicom is probably hungrier and sees the iPhone as a way to draw market share.
  • A hungry company is more likely to agree to terms and revenue splits that Apple likes.
  • The Chinese market is a price-sensitive one. (At least, that's what people doing business there have told me over the years.) So Apple knows that it will only see a fraction of consumers switch, but even with the "small" China Unicom share, the company is still in front of a number that is roughly half the entire U.S. population.
It's a smart move because in one step, Apple has an enormous untapped potential. Even if only a small percentage of mobile consumers move to an iPhone, the mass of the overall market is likely to provide plenty of money.

It's clear that Apple will have had to scale back its per unit profit expectations given the market dynamics. In 2008, China Unicom's ARPU (average revenue per user per month) was RMB42.3, which works out to about $6.19. And that was down 7.4 percent from 2007. Compare that to Apple's current U.S. partner, AT&T. In the second quarter of 2009, cellular ARPU was $50.70. Even data ARPU was $14.57.

Put more bluntly, China Unicom makes a little over a tenth per user of what AT&T does. The bulk of consumers aren't going to spend the same amount for a phone as a U.S. buyer would, and even if Apple gets a slice of the service subscription revenue, it's going to be far lower than it gets elsewhere. Although iPhone volume could greatly increase for Apple, it seems likely that net income per unit is going to drop, as well the estimated 60 percent margins that have subsidized the decreasing average net sales for Macs. Apple is visibly shifting its underlying business strategy away from its traditional high margin, relatively low volume approach and toward a more common consumer electronics model, which makes sense given the general shift in product direction. The change is gradual and management will try to pull in every margin dollar it can while possible, but it's going to happen.

iPhone image courtesy Apple Inc.

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