Apple Needs China More Than It Does Verizon

NEWS ANALYSIS: For Apple's iPhone to truly be a world-class smartphone, it needs to be everywhere in the world. But the iPhone isn't officially distributed where it needs to be most: China, the world's largest cell phone market. Recent noise about possible future iPhone deals with U.S. carriers shouldn't drown out the silence about China.

Last week, bloggers chattered about AT&T's exclusive iPhone contract expiring in 2010 and Verizon's desire to carry Apple's smartphone in 2011. It was a silly discussion because Apple's bigger problem is China. The company desperately needs a carrier distribution deal in the world's largest cell phone market. China distribution is something that must happen soon, if Apple ever hopes to make the iPhone into the successful platform it has the potential to be.

Sure, Apple needs Verizon-Sprint and T-Mobile, too. But AT&T's exclusive U.S. iPhone distribution deal and Sprint and Verizon technology limitations are barriers to iPhone availability through any other U.S. carriers. Even without AT&T exclusive deals, Verizon would be no immediate option for the iPhone. Apple decided against making a CDMA iPhone, a good choice with the world largely standardized on GSM (granted frequencies vary across some geographies). Forthcoming 4G networks will put more carriers everywhere on the same technologies, including Verizon, but not for several years yet.

Is iPhone Smart Phone Enough?

No question, Apple's exclusive AT&T deal has lost luster. In 2007, the exclusive agreement made sense. Apple was a new and untested handset manufacturer. Apple was a beggar, and one turned away by Verizon. The exclusive AT&T deal got the iPhone to market and gave Apple a decided amount of control over the device and supporting services. But two years later, the AT&T exclusive deal holds back the iPhone, allowing BlackBerry a greater sales surge and market share gains. Two things are working well for BlackBerry:

• The hip president of the United States, Barack Obama, uses the smartphone.

• Research In Motion distributes BlackBerry through all major U.S. carriers. Apple has one.

Between the third and fourth quarter, iPhone sales dropped from about 4.7 million units to 4 million. Sequential BlackBerry sales rose from 5.8 million units to 7.4 million. Apple will announce first calendar quarter iPhone shipments in just a few days, on April 22. Wall Street consensus is about 3.3 million units, or another sizable sequential decline in shipments. Looking only at smartphones, in 2008, BlackBerry's market share rose to 16.6 percent from 9.6 percent a year earlier. During the same time period, iPhone share increased from 2.7 percent to 8.2 percent. For the broader handset market, iPhone market share was 0.9 percent.

In 2008, according to Gartner, the United States was the world's fastest-growing market for smartphones, growing 69 percent year over year. Smartphones accounted for about 20 percent of all U.S. handsets sold last year. By comparison, worldwide, smartphones accounted for 11 percent of all cell phone sales in the fourth quarter and 12 percent for the year.

Worldwide smart phones sales increased 3.7 percent year over year in the fourth quarter, for 38.1 million units sold. For the year, smartphone sales rose 13.9 percent, for sales of 139.3 million units. U.S. smartphone sales were about 9.8 million, assuming 20 percent of sales. By comparison, for China, smartphones accounted for between 7 percent and 8 percent of all handset shipments in 2008. If measured at 7 percent, then manufacturers shipped 12.6 million smartphones, making the market already considerably larger than the United States. Global leader Nokia lost about 2 percentage points of market share in the Asia-Pacific region in the fourth quarter, without Apple officially selling one handset in China. Nokia's share loss shows the potential gains with the iPhone available to Chinese buyers.