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SAN FRANCISCO -- It's finally happening.
After years of anticipation and speculation, China Mobile is expected to announce a deal with Apple to offer the iPhone to its hundreds of millions of customers.
The announcement could come as early as Wednesday when China Mobile is expected to roll out its Fourth Generation (4G) wireless network, according to The Wall Street Journal.
The iPhone is still offered by less than half of the carriers in the world, and expectations for Apple to finally cut a deal with state-owned China Mobile have been building for years. The Chinese mobile carrier has a huge subscriber base of nearly 760 million customers.
While selling more phones is a good thing, the devil will be in the details. Most important, investors and analysts will be watching closely to see what impact the deal will have on unit pricing, margins and other financial factors that could affect the company's earnings and revenue outlook.
Bernstein Research analyst Toni Sacconaghi says China Mobile isn't likely to pay a lower price for its devices, but he suspects that the carrier may have managed to wangle other concessions, such as more control than usual in its ability to market the devices and more lenient commitments as to how many handsets it must or can sell. Sacconaghi and his Hong Kong colleague, Chris Lane, who covers the Asia-Pacific telecommunications industry for Bernstein, estimate China Mobile could add as many as 15 million phone sales for Apple in the first full year of the deal.
However, estimating phones sales is tricky, and the analysts admit their figure is at the lower end of the prediction spectrum. Some analysts estimate that as many as 40 million units could be sold, which could be "potentially overzealous," Sacconaghi warns, adding that some extrapolation to arrive at such forecasts is perhaps overly simplistic. Apple has sold about 23 million iPhones in China over the past year. Because China Mobile is roughly twice the size of the other two carriers combined that already sell the iPhone, some analysts are simply doubling the recent annual sales number.
But there is a lot more involved than that.
The analyst says his methodology included a "top-down reality check" that takes into account factors such as how many Chinese consumers can actually afford to purchase iPhones. What's more, there are already about 45 million "pre-paid" iPhones on the China Mobile network. These are unsubsidized phones that are unlocked and altered by their owners.
The Bernstein analysts assumed China Mobile's rollout would be relatively immediate across China's major affluent Eastern cities. They are also betting China Mobile's "post-paid" price for the iPhone is competitive with other Chinese carriers. Post-paid customers purchase phones whose prices are subsidized, but they pay higher upfront costs for the handsets than most other customers in other countries.
The big question is how many current iPhone users might switch to China Mobile from other Chinese carriers who already sell the handset, such as China Unicom and China Telecom. Sacconaghi suggests Apple and China Mobile could enjoy a surge in customers who migrate from other carriers in the first year or two. Post-paid sales could be the biggest opportunity for China Mobile, he adds.
If Apple were to sell 15 million more iPhones over the course of a year as a result of a China Mobile deal, the boost in sales could deliver about $9 billion in additional revenue and perhaps as much as $3 a share in additional annual earnings. Bernstein's earnings estimates currently don't include the benefits of a China Mobile deal, preferring to wait for the exact details in order to better estimate the impact. But Sacconaghi warns other analysts may have already baked in the potential for such as deal.
While his earnings estimates for the fourth calendar quarter of 2013 of $14.75 are higher than the average consensus earnings of Wall Street of about $14 per-share, his estimates for the first and second quarters for calendar 2014 are below consensus estimates. His 12-month price target for Apple shares is $600. Shares closed slightly up, at $557.62, in trading Monday.
Of course, price targets are likely to change if there is indeed a China Mobile deal unveiled this week. Apple shares have been rebounding from its summer doldrums, when shares dipped to a 52-week low of $385.10. Apple's sales in China, which CEO Tim Cook has acknowledged will soon be Apple's largest market (no surprise there), have been cooling of late.
The timing of a China Mobile deal could be very fortuitous.
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