Early Christmas Gift for Apple with China Deal

Edited by Vani Rao

China Awards 4G Licenses; to boost Apple’s sales

China’s Ministry of Industry and Information Technology (MIIT) awarded its first batch of 4G licences to China Mobile Ltd (NYSE: CHL), China Telecom Corp Ltd (NYSE: CHA), and China Unicom Hong Kong Ltd (NYSE: CHU) today. China Mobile bagged a total of 130MHz of spectrum in various bands (1.9GHz, 2.3GHz and 2.6GHz), while China Telecom and China Unicom each received 40MHz. The Licences issued are for the TD-LTE variety. The globally accepted 4G standard LTE-FDD license are slated to be awarded next year.

4gThe New 4G services would provide a significant boost to approved handsets of all Smartphone companies, though Apple Inc (NASDAQ:APPL) stands to benefit the most after its flagship models 5S and 5C are offered for the first time on China Mobile, the world’s largest mobile carrier with more than 752 million subscribers.

China Mobile already had around 42 million unofficial iPhone users, which were either brought off-contract or from the grey market and were using the aged 2G network GPRS/EDGE services. When the new Apple models are available with high speed network services it will become very attractive for the users to upgrade if offered the right subsidies. As the Chinese New Year Gift Giving season nears, which will result in substantial promotion and other attractive offers, a huge amount of sale can be expected in the next few weeks or months.

Apple Inc. shares have earlier surged more than 2.7% to close at $566.32, its best performance since December 4, 2012. The primary driver was the upgrade from UBS (NYSE:UBS) from Neutral to Buy and an increase in the price target to $650 from $540. UBS cited that one of the main reasonsfor the upgrade is the likelihood of Applebeing offered a potential deal from China Mobile, the world’s biggest mobile phone carrier by subscriber base.

Apple’s Progress over the Past Three Days

Source: Bloomberg
Source: Bloomberg

Apple to ride on China Mobile network

After years of negotiations, Apple secured the final government license needed to run its iPhone on China Mobile’s proprietary wireless network in September 2013.

iphone

Apple has tried to secure an agreement with China Mobile since 2011, when Steve Jobs reportedly travelled to China to negotiate with the carrier. Meetings with China Mobile, as well as theMinistry of Industry and Information Technology (MIIT), were also key part of Tim Cook’s visit to the country in January.

Technical Tweaks to iPhone

However, a deal with China Mobile required Apple to make a specially crafted iPhone for the carrier’s proprietary network, which proved to be a huge deterrent for the two giants to work together. Until recently, there was a very simple technical reason why: iPhones simply did not work on the China Mobile’s network, which uses TD-SCDMA technology. Moreover, the iPhones just didn’t have the chips required to get onto that network standard. With the launch of the new iPhone 5S and 5C which is compatible with the latest 4G network, the deal is expected to work without a hitch.

iPhones to Sell at a Premium

Unless China Mobile or other carriers decide to subsidize the iPhone, prices for both models in China are still at a premium: the 5C will start at RMB4, 488 ($733) and the 5S model will be RMB5, 288 ($864). For the 5C, that represents a 33% increase over its pricing in the US market.

This comes as great news for Apple after it posted impressive results in Japan afterNTT DoCoMo, Japan’s largest service carrier, started offering iPhone on its networks. In Japan, every 3 out of 4 smartphones sold in October 2013 was an Apple phone. Apple’s amounted 61% of total smartphone sales done by NTT DoCoMo after it began offering iPhones for the first time in Japan.

Bloomberg consensus forecasts Apple’s gross profit at around $68 billion for FY 2014, that can be expected to increase post the impressive sales from Japan and the potential in Chinese markets.

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