Will Apple’s deal with China Mobile boost slowing iPhone sales?

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Apple’s iPhone

Since Apple introduced the first iPhone in 2007, the flagship product has accounted for approximately 50% of Apple’s total revenues. In 1Q 2014, the company sold 51 million iPhones—a 7% increase from the 47.8 million units sold in the same quarter last year.

Apple also launched the new iPhone 5S and iPhone 5C late in 4Q 2013 and stated that it sold 9 million phones during the opening weekend. The iPhone 5C was Apple’s first attempt at a “mid-range” product, as it was an “affordable” alternative to its flagship iPhone 5S. The company has always been known for its premium pricing strategies, but increased competition from Samsung, Google, HTC, and Motorola prompted a revisit to this strategy with the iPhone 5S and 5C. The company was also looking to improve its sales in emerging markets. But unconfirmed news reports in October indicated that there has been a lukewarm response to the 5C compared to the 5S, and Apple has cut orders for the model.

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Analysts also slammed the new launches, as prices of the 5C were considered too high, at $550, for emerging markets. The 5S model was also reported not to have enough innovative features. Industry experts estimate that the 5C and 5S were launched with the intention of improving Apple’s gross margins and not for gaining market share. Apple’s gross margin in the recent quarter was at 37.9%, which was above the company’s estimate of 36.5% to 37.5% but down from 38.6% in the same period last year. Apple estimates a gross margin of 37% to 38% for 2Q 2014.

A deal with China Mobile

In December, Apple and China Mobile announced that they’ve entered into a multi-year agreement in which the iPhone 5S and iPhone 5C will be available from China Mobile’s expansive network of retail stores as well as Apple retail stores across mainland China, beginning January 17, 2014.  Recent news reports indicated that the initial sales have been weaker than expected. Partnerships with China Mobile and Japan’s NTT Docomo are expected to boost sales for Apple in emerging markets. China is relevant to Apple’s growth prospects, as it’s the third-biggest market after the U.S.

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Apple is losing market share in China to Samsung and also to local rivals such as Lenovo and ZTE. With a subscriber base of almost 750 million, China Mobile is a huge opportunity for Apple. China Mobile is also in the process of building the world’s largest 4G network—the latest generation of high-speed mobile broadband access. In 1Q 2014, Apple said sales in Greater China (which includes Hong Kong and Taiwan) increased 29%.

According to a 3Q 2013 report on mobile market share by independent analyst firm Canalys in Greater China, Samsung was the leading vendor, followed by local vendors Lenovo, Yulong, and Huawei. Apple moved back into the top five, ahead of Xiaomi and ZTE.

Kantar Worldpanel ComTech smartphone share data, for the month ending November 2013 said that Apple’s share of smartphone sales continues to grow month-over-month following the release of the iPhone 5S and 5C models. However, its share of most major markets remains lower than the same time last year as it increasingly faces challenges from its rivals. IDC’s 3Q 2013 data showed that iOS had 12.9% market share, second to Android, which led with 81% market share in 3Q 2013.

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