Apple Loses a Big One in China

China Mobile confirms that it has ended talks to team up with Apple on the iPhone. Maybe China Telecom is a better bet as a partner

by Bruce Einhorn

Apple (AAPL) and China Mobile seemed like such natural partners. Apple, whose iPod has eclipsed all rivals, has been shaking up the telecom industry with its iPhone since last June. Like Apple, China Mobile enjoys overwhelming dominance in its market. Apple is king of the hill in digital music players while China Mobile rules in the world's largest cellular market. China Mobile's 370 million subscribers make the state-owned operator the world's largest mobile-service provider.

So investors cheered last fall amid widespread speculation that the two powerhouses were talking about teaming up to launch the iPhone in China. But even as smuggled versions of the iPhone (BusinessWeek.com, 1/24/07) became trophy gadgets for the country's digital elite, talks stalled. And today, China Mobile made it official: Talks are off, a China Mobile spokesperson told reporters. Apple's Hong Kong-based spokesperson would not comment.

The problem for Steve Jobs, it turns out, is that he chose a potential partner with an even stronger hand than his. China Mobile has 70% of the Chinese cellular market and likely had 2007 profits of $11.4 billion, up 28% over the previous year, according to an estimate by Macquarie Bank. The company does that without having to bother with handset sales in China, where the U.S. model of operators buying phones from vendors and then selling them to consumers isn't popular.

Not a Lot of Options for Apple

It's not surprising, therefore, that China Mobile wasn't willing to go along with the sort of deal that Apple has cut with less formidable partners such as AT&T T. "They are just steamrolling over the competition at this point," says Dave Carini, an analyst in Beijing with research firm Maverick China. "Things just look great for China Mobile right now."

China Mobile's near-monopoly discourages some would-be partners from even trying. "China Mobile is the dominant player [and] they have such strong bargaining power," says Neil Shen, founding managing partner of Sequoia Capital China, the Hong Kong- and Beijing-based arm of Silicon Valley venture-capital firm Sequoia Capital. For anyone thinking about trying to do something related to mobile music in China, "it just makes life more difficult," says Shen.

So where does that now leave Apple? In the short term, without a lot of options. There's only one other company, state-controlled China Unicom, that's allowed to offer cellular service today in the country. The company has Houston Rockets basketball star Yao Ming featured in its ads, which could provide Apple with some of the pop-culture credibility it probably wants among young Chinese. But China Unicom has struggled for years after having been forced by the government to offer two networks, one using GSM technology and the other using Qualcomm's (QCOM) CDMA technology. And the company might not even be around much longer. Rumors have swirled for months among people who follow the telecom in China that Beijing will restructure the industry and merge China Unicom into a fixed-line operator.