John Paczkowski

Recent Posts by John Paczkowski

China: Apple’s Land of iPhone Opportunity

Apple may have underestimated Chinese demand for its new iPhone 4S once, but it has no plans to do so a second time.

Remarking on sales of the 4S in Greater China, during the company’s recent first-quarter earnings call, CEO Tim Cook said demand for the device there has been staggering. “We felt we were betting bold, as I think many of you would have thought if you would have known what we were doing,” Cook said of the 4S rollout plan for the country. “But as it turns out, we didn’t bet high enough.”

That’s a rare admission of misjudgment from a company that doesn’t often make them. It’s also a comment that speaks to the massive size of the Chinese market, which remains largely untapped by Apple, thanks to its lone-carrier deal in the country.

Right now, Apple only has a deal with China Unicom, which gives it access to about 10 percent of China’s 150 million “high-end” mobile subscribers, according to Morgan Stanley analyst Katy Huberty. If it were to a sign a similar deal with China Telecom, it would gain access to another 15 million. And if it at long last brought the iPhone to China Mobile, it would gain access to an additional 120 million.

That’s a massive addressable market, and one that Apple can ill afford to ignore. To do so would be to leave a lot of easy money on the table, according to Huberty. She figures that adding China Telecom as a carrier partner would create an additional two million to four million iPhone users in the near term. And adding China Mobile would create a much bigger multiple of that.

“We estimate China Unicom has 3 million iPhone users, implying a 20 percent penetration of its 15 million high-end subscriber base,” Huberty said. “The same penetration at China Mobile given its 120 million high-end subscribers would equate to 24 million iPhones, with 14 million switching from other feature phones or smartphones and 10 million existing iPhone users on the 2G network upgrading to the faster 4G network.”

Huberty expects the iPhone to arrive on China Telecom in the next few months. Its debut on China Mobile, however, will take a bit longer, and isn’t likely to occur until Apple introduces the iPhone 5, which is expected to be compatible with the carrier’s upcoming 4G network (TD-LTE).

So, 24 million to 26 million additional iPhone users, if Apple were to sign up both China Telecom and China Mobile. And that’s the base-case scenario. Huberty’s more bullish view of the situation lifts that number to 40 million, and predicts that a few years from now, Apple could sell 57 million iPhones per year in China alone. And that is truly a spectacular number.

After all, Apple sold 68.5 million iPhones worldwide in fiscal 2011.

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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik