One morning this month, Jessie Fang was thrilled to see on her way to work that China Mobile was advertising the iPhone 4. But when the tourism sales manager went to one of the mobile operator’s shops, she discovered that it has not yet started distributing the wildly popular device.
What the ad on the Beijing subway promotes is a series of new monthly packages under which subscribers are promised cash refunds if they commit to a certain amount of voice and data spending per month on a newly bought
The scheme comes as China’s telecom operators are on the verge of adjusting their smartphone subsidy strategies – a step which could eventually drive their profit margins down closer to the levels seen at operators in more mature markets.
As China’s operators have almost fully penetrated urban mobile markets, the new subscribers they are adding are mostly rural users, who generate far lower revenues. The carriers are therefore under pressure to get as many of their moderately affluent subscribers to start using smartphones as those devices encourage heavier data applications, which will in turn generate more revenue.
Both China Mobile, the world’s largest mobile operator with over 600m subscribers, and China Telecom, China’s third-largest mobile carrier, are in talks with Apple to start distributing its iPhone to their subscribers. Such a move which might entail their making heavy subsidies for the device, as seen at China Unicom, the only Chinese operator which currently distributes it.
"We will certainly see a restructuring of subsidy strategies at the Chinese operators going forward," said Charice Wang, an analyst at Ovum, the telecoms research firm, in London.
China’s smartphone market is already growing faster than that worldwide. IHS iSuppli forecasts that shipments will rise to more than 54m units this year, from 35m last year. By 2015, the Chinese smartphone market will have ballooned to 112m units, representing a compound annual growth rate of 26 per cent, compared with 20 per cent worldwide, says the research firm.
But China’s consumers will only keep buying if prices keep falling, partly supported by subsidies, analysts warn.
"Some mid-range and high-end consumers have tended to spend on smartphones early or even finance them," said Gao Yuan, an analyst at IDC in China, adding that market growth slowed in the second quarter as some demand had been spent early.
Chinese mobile operators have been subsidising handsets since 2005, but greatly increased the practice since they rolled out third-generation mobile services in 2009.
"So far, the Chinese operators have largely subsidised low- and mid-range smartphones," says Anand Ramachandran, an analyst at Barclays Capital. "I believe that going forward they will gradually shift to high-end devices.
This change is an attempt to bring the top segment of mobile subscribers, the ones who have picked up smartphone use over the past few years, to spend more.
This top segment is a minority of the vast Chinese market. As in many other developing countries, the majority of consumers use pre-paid cards because they are cheaper than long-term contracts. "Operators are unwilling to offer subsidised smartphones to this crowd because there is no guarantee that such a consumer would stay with the operator and generate revenue," says Ms Wang.
Mr Ramachandran estimates that 200m to 250m of China’s 900m mobile subscribers are on long-term contracts.
But the operators remain cautious over how to target this group – China Mobile’s new promotion scheme is one example as it does not offer any subsidies upfront but only monthly refunds.
The company has been in talks with Apple over a potential iPhone distribution deal for more than two years. China Mobile’s use of the unpopular, homegrown 3G wireless technology, TD-SCDMA, is one hold-up. Apple would need to offer a customised version to work on that network.
"Given that China Mobile itself is already focusing on the coming 4G roll-out, I think such a step is highly unlikely now," says Mr Ramachandran.
Things are easier for China Telecom, because it relies on a widely used 3G wireless technology called CDMA, which is suitable for the iPhone.
If China Telecom closes a deal, expected early next year, this could become the starting shot for a smartphone subsidies race in China. Analysts believe China Mobile might try to counter by distributing a subsidised older version of the iPhone for use on its 2G network as a stop gap measure, and China Unicom might be driven to increasing subsidies to keep its subscribers of more recent models.
"The risk of a period of irrational handset subsidies cannot be ruled out," says Mr Ramachandran.
