Apple vs. China Mobile: Battle for the iPhone

It’s the Irresistible Force meets the Immovable Object. Apple, the Californian electronics firm, and China Mobile, the state-owned telecommunications giant, have been locked in a slow, secretive, yet embittered year-long struggle to release and control Apple’s iPhone in mainland China.

By “control” I refer to both revenue from user contracts/subscriptions, as well as to the profit from Apple’s innovative ‘App Store’, which is an online shop for extra, useful applications that can be added to the iPhone smartphone by the user; some are free; most need to be purchased using a credit card in the App Store, which can only be accessed via Apple’s iTunes software.

In both those areas, Apple (NASDAQ:AAPL) and China Mobile (NYSE:CHL) have locked horns over their positions on pocketing the profits from user contracts, and keeping control of the revenue from the ‘apps’. And both firms refuse to budge.

Like two goats locked in haughty conflict over a, erm, lady goat, Apple and China Mobile are not going to get anywhere without someone conceding ground, so that one of them can get the lady goat release the iPhone in mainland China on their own terms. In the meantime, both companies are losing out on extra revenue as hundreds of thousands of middle-income Chinese go ahead and get a grey-import unlocked iPhone sourced from Hong Kong or Europe, albeit at the exorbitant price of between 5000 to 7000 RMB for the 8- and 16-gigabyte models.

What They Want
China Mobile, as most state-owned firms (albeit one listed on the New York Stock Exchange, and boasting the world’s largest number of subscribers) doesn’t care too much about what customers want, and has decided on its own objectives regardless. Depending on which sources you believe, China Mobile either wants 1: Wi-Fi to be ripped out; 2: all the revenue from user contracts; 3: rip out the ‘old’ 3G chip and replace it with the new Chinese TD-SCDMA standard chip instead, for forthcoming TD-SCDMA connectivity; 4: to set up its own ‘App Store’ from which users can download more apps, and which doesn’t require a credit card. Or, perhaps, all four demands, or a combination of the four.

Apple, meanwhile, likes to keep things simple, doesn’t like being messed about (Apple CEO, Steve Jobs, spends his Christmas Eve making music executives cry), and doesn’t bend to weird demands from outside sources, so they’re being as ‘immovable’ as China Mobile is. Specifically, they will not 1: rip out wi-fi connectivity, although they curiously obliged for only the Egyptian market late last year; and 2: allow anything but their own App Store to be able to add apps to the iPhone, and thereby keep app revenues all to themselves; 3: they’re thinking that 3G is the global king right now, until ‘4G’ pops up. Contracts are, apparently, no longer an issue, as Apple has dropped the subscription model.

Where I call BS
China Mobile, in its demands for setting up its own store for adding applications to the iPhone, has effectively identified this as the sticking point. But, their motives don’t hold up to scrutiny, as they’re claiming that customers won’t be able to access Apple’s own store as it requires a credit card. But that is nonsense now that almost all of China’s middle-income punters have at least one credit card, and they’re surely going to be the people likely to buy a pricey smartphone; thus it seems that China Mobile is hoping to keep people in the old habit of having to schlep to its own stores to add credit and do anything to their phone, rather than giving the freedom of an online store. Apple already has an Apple App Store for China (though not a full iTunes store) with plenty of apps, but who-knows how many punters.

As for TD-SCDMA… Well, apart from a few TV adverts showing a man on the train waving oddly at his mother during a ‘video call’, and promoting a vague ‘3G lifestyle’ (“3G生活”) and highly unrealistic notions of watching TV on your mobile, it’s not clear what shape TD-SCDMA will take, and few results have been released of localised tests in 8 specific cities. Creating a new standard might be as disastrous and costly as the recent Bluray vs. HD-DVD format war.

Apple, then, has curiously not opted to sell the iPhone ‘unlocked’ in mainland China, simply to get it out there, and to bypass the grey market. But, upon closer inspection, it has only offered unlocked phones in markets where local competition laws have demanded it, as those laws have disallowed one carrier having sole right over release. That’s because Apple loves control as much as its control-freak CEO, and so it will only do a full release in China when it has one exclusive carrier (but only China Unicom, NYSE: CHU, remains as an option), nothing needs to be ripped-out, and the App Store is the only way to add apps to the device, as is the case in every other country around the world.

Lost the Battle; Won the War
Result? An impasse, since November 2007 when iPhone started to roll out in other countries besides the US. One solution is China Unicom, who will launch a standard 3G network (ie: not TD-SCDMA) on May 17th this year, prompting the top-flight tech blog Ars Technica to call a May 17 release for Apple’s slim smartphone here in the mainland on that same day.

But don’t hold your breath, as wi-fi is still a stumbling block, with no legit phone sold in China allowed to have wi-fi (hell knows why). If it does happen, it’ll be a huge boost for China Unicom, which is the minnow of China’s telecommunications duopoly.