China Mobile Ltd. (ADR) (NYSE:CHL), the world’s largest telecom company by total subscribers, has also held out on carrying the iPhone. China Mobile’s user base hit 735 million users in May, and it is gaining roughly 4 to 5 million subscribers monthly, without offering a single iPhone. China Mobile’s month-on-month 3G subscriber base is also the fastest growing in China, which means that Apple doesn’t have much clout to convince China Mobile to agree to any kind of purchase commitment. Samsung notably sold 12 million smartphones in China last quarter, more than twice the number of iPhones sold by Apple. Lenovo and Huawei also outsold Apple, selling 8 million smartphones each. In addition, Chinese customers have a myriad of Android options to choose from, such as high-powered, low-priced smartphones Xiaomi and Huawei.
Last quarter, China Mobile’s earnings rose 3.8% as its revenue increased 5.7% from the prior year, outperforming the comparably sized AT&T Inc. (NYSE:T), which reported 3.2% earnings growth on a 1.5% revenue decline last quarter.
Beggars can’t be choosers
With every quarter of market share losses that Apple reports, Tim Cook is pushed closer to accepting whatever terms NTT Docomo and China Mobile offer him. Now, as Verizon’s deadline draws nearer, Cook will be faced with a daunting choice: should he force Verizon to purchase $12 billion to $14 billion of iPhones, or should he cut it some slack to save what friends it still has?
On the other hand, cramming 19 million unwanted iPhones down Verizon’s throat will result in steep discounts that could help Apple gain some much needed market share at Verizon’s expense. Yet this move could cause Verizon to refuse to sign future agreements with Apple, and force it to follow the example of NTT Docomo and China Mobile, by promoting Android handsets instead.
The Foolish Bottom Line
Apple investors need to watch the outcome of its upcoming confrontation with Verizon closely, since it could set a future precedent for Apple’s negotiating clout with telecom companies. Tim Cook needs to realize that the iPhone isn’t as attractive to telecom companies as it was before, and that he may need to make some steep concessions to regain market share against Samsung and its Android brethren. At this point for Apple, gaining more telecom allies worldwide is infinitely more important than promoting one-sided, risk-free deals.
The article Will Apple Really Force Verizon to Cough up $14 Billion? originally appeared on Fool.com and is written by Leo Sun.
Leo Sun owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile. Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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