A better solution
Most telecom companies in the U.S. work out deals with phone manufacturers to subsidize the price of phones by locking customers in to expensive monthly contracts. Looking abroad, especially in developing areas of Asia, that business model is the exception rather than the rule.
China Mobile Ltd. (ADR) (NYSE:CHL), China’s largest mobile phone service provider with 700 million customers, is one of those exceptions. It’s leading the way in developing a 4G network, which bodes well for the high-end smartphone market in China. What’s more, it recently signed a deal with Nokia to bring its Lumia 920T to customers with a subsidized plan that lowers the price to virtually free.
Apple ought to secure a similar contract, as the company is already in talks with China Mobile to bring the iPhone 6 (or 5S) to the company and capitalize on its expanding 4G network. Subsidized iPhones clearly sell. iPhone sales in the United States, where the minimum price is now $0 (with a contract), are starting to eat away at Google Inc (NASDAQ:GOOG)’s dominance.
If Apple can achieve price parity with China Mobile Ltd. (ADR) (NYSE:CHL) subsidies, a similar effect seems very likely. While Android may currently account for nearly three-quarters of China’s mobile phone market, many come from low-end local manufacturers. A subsidized iPhone looks much more attractive than a cheap low-end or mid-range Android phone.
In fact, similar contracts with China Telecom and China Unicom led to Apple’s best product launch in China yet when it launched the iPhone 5 in December. While many stood in line at Apple stores for the unsubsidized phone, many more flocked to China Telecom and China Unicom stores to snatch up the phone for less than $100 (compared to $850). As a result, Apple sold over 2 million phones on launch weekend.
Stick to what it does best
Many analysts expect Apple Inc. (NASDAQ:AAPL) to release a low-cost iPhone as early as this summer to compete with Samsung and other Android phone makers. While this might move the stock price up in the short term, I don’t think it will have a significant positive impact on profits. It will likely hurt Apple’s already diminishing profit margin as well as its brand image. Instead, Apple needs to work out a deal with China Mobile Ltd. (ADR) (NYSE:CHL), and stick to its core competencies. A big subsidy contract ought to provide a real catalyst for the stock to climb out of its current rut.
The article Why Apple Doesn’t Need a Low-Cost iPhone originally appeared on Fool.com and is written by Adam Levy.
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