Initial iPhone demand from China Mobile sluggish

SAN FRANCISCO - In the first week after China's largest mobile carrier began taking orders for Apple's newest iPhones, sales of the devices in that country were likely less than some on Wall Street had expected, according to a report released Thursday.

"We recently talked with China Mobile's local stores, handset distributors and retailers after (it) formally launched the iPhone 5s/5c, and we think overall demand is weaker than our already conservative expectations," said the research note from Wedge Partners analyst Jun Zhang.

One reason the note cited for the weakness: The iPhone 5 already had been available for sale by two of China Mobile's smaller rivals in that country for several months.

The report also noted that some third-party retailers in China had trimmed their iPhone 5 prices to better compete with sales from China Mobile.

Coming just ahead of Apple's fiscal first-quarter earnings report Monday, the note is a reminder that while iPhone sales in China will boost Apple's revenue, they won't be as lucrative for the company as sales in the U.S. and other developed economies.

It's also a reminder of a broader smartphone trend that's seen increased competition across the globe, with average sale prices falling 12.5% in the third quarter, according to market researcher IDC.

That competition could hurt Samsung Electronics, the world's No. 1 smartphone maker, even more than Apple in China.

The Korean giant on Friday reported in-line fourth-quarter results but warned of weaker first-quarter demand for its devices.

Samsung said it's seeing stiffer competition from Apple and its high-end devices and from Lenovo for low-cost smartphones.

Lenovo is one of several aggressive China-based competitors that are eating into Samsung's lead there, while also confining Apple to a high-end niche of the market.

While China is the world's largest market for the devices, many parts of that country don't yet have wireless networks sophisticated enough to take advantage of the features on Apple's and Samsung's high-end phones.

Combined with the country's relatively low per-capita income versus Europe and the U.S., it's kept the majority of smartphone buyers in China focused primarily on price.

Apple has already reported the impact of falling smartphone prices there. During the quarter ended in September, Apple's iPhone unit sales in China rose 25% year-over-year, yet revenue from the devices rose just 6 percent.

The Wedge Partners' report also noted another important market dynamic in China. Namely, that subsidies paid by wireless carriers in that country are not what Apple, Samsung or their customers are used to in the U.S.

"We found many China Mobile local stores only offering unlocked iPhone 5s/5c models instead of contract-based iPhone 5s/5c units," Jun Zhang wrote.

Contract phones have much higher retail prices that are usually offset by carrier subsidies.

Wedge now estimates China Mobile sold between 350,000 and 400,000 iPhone 5 devices during the carrier's four-day launch window, less than the firm's expectation for 400,000 to 500,000 units. Of those, 100,000 were likely unlocked, the report said.

The firm believes Apple will sell 35 million iPhones in China this year, with 16 million bought by China Mobile customers.

Apple executives will share their own updated business and product forecasts during Monday's earnings call.

Holiday sales of the company's newest iPhones and iPads are expected to help it meet its current forecast for gross profit margin to hold steady at roughly 37% of revenue - a key metric watched closely by Wall Street.

Analysts are expecting the company to report that quarterly sales rose 5% to $57.5 billion, with profit seen edging up 2% to $14.09 per share.

Apple shares have risen 40% since June, helped in part by optimism for iPhone sales in China.

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