Apple’s (AAPL) China Adventure, The Death Of iPhone Margins

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After over a year of playing cat and mouse, it looks like Apple (AAPL) may be close to a deal with China Mobile (CHL) to sell the iPhone on the mainland. Since the country has more cellular subscribers that any nation in the world and the base is growing rapidly, it may be the most critical deal Apple can strike to drive rapid adoption of its newest product.

The problem that China Mobile has had with Mr. Jobs is that he wanted a piece of the subscription revenue from each customer who bought the phone. He seems to have dropped that requirement. According to Reuters, "Apple is no longer insisting on a revenue-sharing policy, so the biggest hurdle for China Mobile to bring in the iPhone has been cleared, but there are practical issues still to be resolved," said China Mobile spokeswoman Rainie Lei.

In the process of getting into China and some other markets, Apple is taking a very significant risk. A piece of the subscription revenue for each iPhone buyer could be worth several hundred dollars every year year for every unit. Giving it up hurts the profit for each handset sold. Apple is also dropping the price of the 3G iPhone to drive adoption.

Apple may eventually end up selling 20 million iPhones worldwide every year. It will be faced with the unpleasant reality the now bedevils firms like Motorola (MOT) and Nokia (NOK). Sales volume is not any good as a substitute for a high yield on each product. Low margins have never been part of the Apple formula for success.

That is probably about to change, and Apple is going to be much worse off for it.

Douglas A. McIntyre

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