Yesterday, Dan Frommer assessed a potential Apple iPhone deal with China Mobile (CHL) or China Unicom (CHU). Last night, Reuters reported several reasons why a China deal isn’t imminent, and we responded by saying that while it may not be imminent, it’s inevitable. In this follow-on analysis, we look at what a China deal might mean for Apple in terms of annual revenue.
There are several considerations:
- Total China mobile subscribers
- Potential iPhone market share
- Potential iPhone price points (and subscription revenue share, if any)
- Average life of each iPhone (Number of years before phone replaced)
We ran the numbers using ranges of assumptions (described below) for most of these considerations. The bottom line, not surprisingly, is this…
China’s mobile market is so huge that even if Apple gets only a tiny slice of it, even if China’s wireless operators stiff Apple on the subscription-revenue share, and even if Apple has to cut the iPhone’s price, we’re still talking big dollars.
How big? We estimate that a 2% share of China’s 600 million mobile subscribers (projected 2008) with a $300 unit price tag and no revenue share would yield $1.8 billion in incremental annual revenue. (For comparison, after only three months of iPhone sales, Apple already has a 1/2% share of the U.S. market). A 5% share at the same price would produce $4.5 billion in annual revenue.
Number of Mobile Subscribers in China. Citi puts this at 530 million this year (combination of China Mobile and China Unicom) and about 600 million next year. We’ve used 600 million, which is more than twice the size of the current US market. Obviously, as the market continues to grow, the opportunity gets larger.
iPhone Penetration. We’ve run a range of numbers, from 1% to 5%. Obviously, even 1% would probably take a couple of years to reach.
- For perspective: After 3 months of iPhone sales, the iPhone is already used by about 1/2% of US subscribers (1.1 million out of 240 million).
- Citi estimates that 183 million handsets will be sold in China in 2008. If the iPhone captured 1% of China subscribers, and the subscribers each bought 1 iPhone every two years, this would equate to a 1.5% share of the annual China handset market (using the 2008 numbers).
- Some challenges Apple will have in China include the lack of a retail presence, distribution system, and brand awareness. These can no doubt be overcome, but they’ll probably limit sales for the next few years.
iPhone Price: In light of China Mobile CEO’s blustery insistence that China Mobile would never share subscription revenue with Apple in China, we’ve run the numbers with no revenue share. We’ve also run a range of price points, with the “base” case at $300 per iPhone (25% less than the current unit price here). SAI Apple analyst Dan Frommer cautions that Apple’s profit margin on the each unit would be far less without the revenue share and that Apple might have to spend heavily to promote and service the iPhone in China because it lacks a retail infrastructure. So it’s important to note that a dollar of iPhone revenue in China will not be the same as a dollar here.
Average iPhone Life. We’ve assumed that the average iPhone user will replace the handset every two years.
China’s mobile market is so huge that the revenue numbers are meaningful even if Apple only gets a tiny slice of the pie. Our annual revenue estimates range from:
- $600 million a year, at 1% penetration and a firesale $200 unit price (with no revenue share), to:
- $6 billion a year, at 5% penetration and a stable $400 price point (again, no revenue share).
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