This article first appeared in MarketWatch.com.
After
months of anticipation for the “official” iPhone release in China, the news
last week was not so exciting: only 5,000 iPhones sold over the first weekend.
Even the typically bullish, and usually correct, Gene Munster of Piper Jaffray
called this “a disappointment” and lowered his China 2010 iPhone sales forecast
from 1-2 million to 550,000.
What
does this news really say about the prospects for iPhone growth in China and
worldwide? Not much really, and here’s why:
1.
Apple is already profiting in China from gray market iPhone sales.
Forget “official” for the moment and check a few Apple message boards or
forums. You’ll find posts from China techies who have owned unlocked gray
market iPhones for years. Some have already sold their first generation iPhones
and are now on to their second. In fact, the China
Market Consulting Group estimates that 3.5 million Chinese already
owned unlocked iPhones prior to last week’s launch.
This
also disputes the contention that the high price of the entry-level iPhone 3GS
in China (over $500 US) is a deterrent. In fact, gray market iPhones likely
sold, and continue to sell, at prices close to or above the current official
price.
2.
Apple’s carrier limitations, for China and elsewhere, are temporary and will
resolve themselves. China Unicom (NYSE:CHU), Apple’s wireless carrier
there, and the Chinese authorities placed roadblocks in the way of smooth
iPhone proliferation, among them disabling its WiFi capabilities as well as
limiting the availability of certain apps. These decisions and other delays
allowed the gray market to flourish with China Unicom the loser, but Apple
still pocketing profits. In addition, most Chinese consumers prefer
pay-as-you-go plans, not ongoing service contracts mandated by China Unicom’s
iPhone.
China
Unicom will eventually have to face market realities and offer pricing and
plans in tune with their audience. Ultimately, its exclusive with Apple will
expire and China Mobile (NYSE:CHL), the country’s largest carrier with 70% of
the market and its most upscale market segments, will at some point offer the
iPhone. In the meanwhile, the brand-conscious Chinese, for whom gray
market shopping is a way of life, will still be able to buy one. If China
Unicom sales remain tepid, expect some changes soon; Apple’s past actions show
it moves quickly to adjust iPhone prices or polices to gain market share.
3.
The iPhone is just getting started, with new models and technologies coming.
Most of the above considerations will also vanish as new iPhone technologies
and models are introduced. Last week’s most credible Apple rumor was
anticipation of a “world iPhone” compatible with both GSM and CDMA systems.
This clears the way for Verizon to offer the iPhone in the U.S., another huge
sales potential for Apple. Knowing the pent-up iPhone demand for users
unwilling to switch to AT&T here, imagine when similar roadblocks come down
in other countries and you get a sense of how far the iPhone can go.
Plus
there are only two iPhone models available now, the 3G (8GB only) and the 3GS
in 16GB and 32GB capacities. This won’t be the case for long. Follow the iPod
template and we could easily have as many as five iPhone models over the next
two years.
Even
more extraordinary is the fact that Apple has only 9%
market share of the fast-growing worldwide smartphone market, but
vastly more of its mindshare. That’s a lot of upside. So given this big
picture, last week’s China “disappointment” was a short term blip in the long
term growth prospects for one of the dominant technology products of the
decade.
Full disclosure: Frank Cioffi is long AAPL stock.
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