The rustling of bets being settled greeted the appearance of an Apple iPhone on a China Unicom website devoted to 3G handsets in late March. For months China’s digerati had been speculating on which operator would launch the iPhone and when. Now they knew.
Or did they? Within two days the picture was gone. A week later China Unicom Chairman Chang Xiaobing said that negotiations with Apple were “ongoing.” But even as Chang was managing expectations, a China Unicom cartoon introducing the concept of 3G and featuring an iPhone appeared on video-sharing site Youku. For reasons known only to the creators, the video used an elephant being stuffed into a refrigerator as a visual metaphor for the benefits of 3G.
It would have been an apt metaphor for the difficulties of launching the world’s most famous phone in China. Apple’s talks with China Mobile dragged on for a year before collapsing over control of the AppStore, through which users can purchase and download iPhone applications, and the need to support the twitchy TD-SCDMA 3G network.
China Unicom, a hungry challenger building a network already supported by the iPhone, is a more natural partner. But talks with Unicom also dragged, reportedly on the need to disable the iPhone’s built-in Wi-Fi to conform to Chinese law and Unicom’s desire to include (horrors!) its own music player.
Meanwhile, China’s legendary gray market got busy, filling the void with up to 1.5 million unlocked iPhones.
Don’t believe the hype
The popularity of grey-market iPhones has spurred much speculation, but some perspective is helpful. Nokia sold 71 million handsets in Greater China last year. The iPhone will also sell here, but it will be far more marginal than the buzz suggests.
First of all, iPhones are expensive. In many markets, Apple’s partner operators subsidize the price. The top iPhone costs US$300 in the US, but requires a two-year service contract costing US$70 per month. A “no contract” iPhone costs a whopping US$700. In Hong Kong, where iPhones are unlocked by law, they cost an arbitrage-crushing US$800. Black market prices in China are similar. Premium phones sell in China, but with new TD-SCDMA handsets retailing for less than US$250, the iPhone is in a different league. Furthermore, 3G service plans here are in the range of US$25-45 per month, suggesting a relatively low subsidy for all but the heaviest (and richest) users. Rumors of a low-cost iPhone are promising, but unconfirmed.
The iPhone’s business model is also problematic because much of the phone’s success depends on the appeal of applications that can be added later. An AppStore has already launched in China for Apple’s iPod Touch, but it is in English and many of the applications are international. One of the most popular is “Cute Asian Girls.” The selection of unauthorized Chinese applications for “jailbroken” phones is better, but that’s useless to an operator with a revenue-sharing deal. Some of those applications may go legit, but the majority of mobile application companies in China develop for Java or Nokia’s Symbian operating system. Most won’t bother to rewrite applications for a niche phone, especially given Apple’s control-freakery concerning what applications it permits in its store.
But perhaps the biggest hurdle for the iPhone is that the mobile market has transformed since it launched.
Two years ago, the iPhone was the only truly elegant palm-sized internet platform. The competition is now catching up, with several touch-screen 3G phones set for launch this summer. Most will be cheaper than the iPhone and many will have better Chinese language support, SMS handling and support for widespread Windows Mobile, Java and Symbian applications. Sleek and sexy 3G netbooks are also arriving, many with legal Wi-Fi and substantial operator subsidies. A mid-range phone and a netbook may become the configuration of choice for many.
The iPhone is superb, but iPods are the world’s best music players and few Chinese will pay a premium for them. Consequently, the iPhone’s impact here will be more of an indirect one, via the influence it has exerted on the industry at large. Like iPods and Apple Macs, the iPhone itself will remain a curiosity for China’s cognoscenti. An elephant, perhaps, but a very small elephant indeed.