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Pricing will be key to success of China Mobile’s deal with Apple – Financial Times

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Pricing will be key to success of China Mobile’s deal with Apple – Financial Times

While China Mobile’s more than 760m subscribers have finally received confirmation that the iPhone 5s and 5c will soon be sold by the world’s biggest mobile operator, they have yet to find out one important detail: the price.

That number will not just be of interest to Apple enthusiasts in China. It will also reveal which of the two companies secured a better bargain after months-long negotiations leading up to the deal announced on Sunday night.

Operators such as China Mobile traditionally agree to subsidise part of the cost of popular handsets, but some are now trying to end that practice. T-Mobile USA recently began replacing smartphones subsidies with mobile device financing plans, while Randall Stephenson, chief executive of AT&T, said that as smartphones become ubiquitous in more mature markets such as the US, “the model has to change. You can’t afford to subsidise devices like that.”

But in China, where smartphone penetration remains lower, analysts see China Mobile’s iPhone subsidy as a battle of wills.

“China Mobile feels that the entire universe should kneel before them given their scale and I don’t think that’s an unwarranted view,” said one investment bank analyst, who asked not to be identified. “It’s just that Apple sees a potentially devastating domino effect if they cut a generous deal with China Mobile that SK Telecom wants and then Verizon and other operators too.”

Some analysts warn that its push into 4G services and phones could cost China Mobile, which already has said it will spend more on subsidies next year than the Rmb27bn ($ 4.5bn) it spent this year, despite a slowdown in sales growth of high-end phones.

Shares in China Mobile rose 0.8 per cent on Monday in Hong Kong.

Barclays says the company’s “aggressive” plans to build its 4G network and sell compatible handsets including the iPhone, while boosting handset sales, could hurt profitability.

State-run China Mobile sees the distribution deal with Apple as an important endorsement of the new technological standard, TD-LTE, underpinning its new 4G network. Most international 4G operators use a rival standard, FDD-LTE.

“The collaboration between Apple and China Mobile will give a big boost to the development of China’s homegrown 4G/TD-LTE technology,” the Chinese company said.

For Apple, the mere fact that an agreement has been reached will help salvage what had been building up to be an awful year for the California technology company in the world’s largest telecoms market.

In April, Tim Cook, Apple’s chief executive, was forced to apologise for “misunderstandings” after his company was targeted by China’s state broadcaster CCTV for a host of alleged failings related to customer service and communication with domestic media outlets.

Apple’s global launch of the 5s and cheaper 5c also appeared to disappoint initially. In addition to the lack of a distribution deal with China Mobile, Apple put a higher than expected Rmb4,488 price tag on the 5c.

That appeared to set the stage for further erosion of Apple’s market position in China, which had been undercut by international rivals including Samsung Electronics and a host of cut-price domestic brands, such as Xiaomi’s popular “Red Rice” handset. “Enormous business gets done with Apple here but it is moving quite quickly into Samsung,” Greg Foran, head of Walmart’s China operations, told reporters last week during a tour of a Sam’s Club retail outlet in Beijing.

But initial surveys suggest the 5s and 5c devices could be turning the tide back in Apple’s favour. Counterpoint, a market research firm, estimates that the company’s share of the China smartphone market more than doubled to 12 per cent in October, having been stuck at less than five per cent for the previous six months. Three of the top four selling models in October were Apple iPhones.

China Mobile has estimated that more than 45m iPhone users are already on the company’s network, but have had to put up with poor performance owing to the device’s incompatibility with China Mobile’s homegrown 3G standard.

China Mobile says the new 5s and 5c iPhones will resolve the compatibility issues. But some potential customers at Apple’s flagship store on Monday remained wary.

“I won’t use the 4G iPhone because I’m not sure if the connection will be stable,” said one man who gave only his surname, Liu, and is a China Unicom 3G subscriber. “I don’t want to be the first one to try it.”

Additional reporting by Wan Li

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