September 2013

Lawrence Lundy, Consultant, Information & Communication Technologies

“50 Years of Growth, Innovation & Leadership”

Mobile & Wireless CommunicationGrowth in China on Hold as Apple Prioritizes Margins over Market Share

A Shortened ICT Beat

Apple is buildingthe foundationsfor long-termgrowth with

TouchID, the M7and the A7

Apple is targetingenterprise

customers andChina for short-term growth

Growth in China on Hold as Apple Prioritizes Margins over Market ShareA Shortened ICT Beat

© 2013 Frost & Sullivan Page 2

This is an edited version of a longer, more in-depth ICT Beat. To gain access to the full ICT Beat,

and for more analysis of the Mobile & Wireless Communication Industry, contact Lawrence Lundy.

With the recent release of the iPhone 5S and the 5C, Apple has, for the first time, two versions

of the same handset on the market. The 5S includes all of the latest hardware including a

fingerprint sensor, an improved camera, and two faster processors. The 5C is Apple’s first foray

into the non-premium market, coming with a plastic case and inferior hardware specs, although it

does come in a variety of colours.

This ICT Beat will argue that Apple’s long-term strategy looks strong, with growth potential in

the enterprise market, the wearables product category, and all supported by the unification of OS

X and iOS. In the short-term, however, the failure to announce a deal with China Mobile and the

high price of the iPhone 5C means that Apple has severely limited is growth potential in the

world’s largest smartphone market.

TouchID is a true innovation and will revolutionize online payments.

TouchID, a fingerprint sensor, is built directly into the 5S’ home button, and users can use sensor

to unlock the device and authenticate iTunes purchases. Crucially, in the wake of the NSA

revelations, fingerprint data is encrypted and stored locally on the device, where is will not be

uploaded or shared with third-parties. The fruits of this technology will become clear when Apple

allows TouchID to authenticate purchases other than on iTunes.

The M7 processor is the foundation upon which Apple will build a wearable

computing business.

The M7 is less of an innovation in itself, instead it serves as the foundation upon which Apple’s

future wearables business can be built. Billed as a ‘context-aware pervasive system’, the M7 is a

processor, that has direct access the accelerometer, gyroscope, and compass bypassing the need

for the phone to use the main A7.

The 64-bit iPhone 5S is the another step toward a unified iOS across all of Apple’s

devices.

The 5S is the first smartphone to include a 64-bit processor, shipping with an ARM A7. The new

processor offers faster performance, especially for intensive tasks such as video encoding and

high-end gaming. The real benefit of 64-bit processors is the ability to address more than 4GB of

RAM, which enables it to achieve PC level performance.

Free iWork and TouchID is more bad news for Microsoft

Apple, unlike competitors Microsoft or Google, derives majority of revenues from hardware not

software or services. It therefore makes strategic sense for Apple to offer customers its range of

productivity apps, collectvity known as iWork, for free after offering iWork for for free earlier in

the year.

China Mobile is the key to growth in China

China is the largest smartphone market in the world, accounting for 33 per cent of all worldwide

shipments in 2012, and Apple is fast losing market share. It fell from 9 per cent in 2012 to just

4.8 per cent in 2013, and into seventh place behind Samsung, Lenovo, Yulong, ZTE, Huawei, and

Xiaomi. Apple already has distribution and subsidy arrangements with both China Unicom and

China Telecom, who have 35% of Chinese subscribers on their networks. However it has no

access to China Mobile’s 740 million subscribers and 65% of Chinese subscribers.

Apple cannot compete with budget Android Manufacturers

Agreeing a deal with China Mobile would open up millions of new customers to Apple; however

the price of the 5C will still prevent Apple from really competing in China. The 5C not priced as

a budget phone - it will retail between 4,488 yuan ($733) and 5,288 yuan ($864). Compare this

to the flagship Xiaomi M3- the biggest selling phone in China - at 1,999 yuan ($330), and the

Lenovo K900 IdeaPhone at 3,299 yuan ($539).

The financial markets felt that this was a dissapointing launch with Apple’s shares down 2.3%

shortly after the announcement. Markets are, of course, reactive and are always looking for short-

term gains. They tend to underestimate long-term features such as the A7, M7 and TouchID. With

the two new iPhones, Apple has shown that it has a longer-term strategy built around payments,

wearables, enterprise, and a unified operating system.

Despite the numerous positives, the real disappointment is the high price of the 5C and the

failure to announce a distribution deal with China Mobile. Even if a deal is agreed later in the year,

the price of the 5S will mean Apple is only likely to achieve marginal growth in China. By insisting

on maintaining such high margins on the iPhone, Apple have serverly curtailed their potential

growth in China.

To gain access to the full ICT Beat, and more industry analysis contact:

Lawrence Lundy

Consultant, Information & Communication Technologies, Frost & Sullivan

Telephone: +44 20 7343 8322,

Email: lawrence.lundy@frost.com

Twitter: @lawrencelundy

LinkedIN: http://uk.linkedin.com/in/lawrencelundy

Growth in China on Hold as Apple Prioritizes Margins over Market ShareA Shortened ICT Beat

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Margins overMarket Share - A

MissedOpportunity in

China