Can Apple teach China about quality?

The doom and gloom about Apple's future contimues. The party line goes that Cupertino must repent of its ways and make a New Year's resolution to produce cheaper and cheaper systems. How else can it really succeed?
Written by David Morgenstern, Contributor

Apple recently admitted that in mid-January iOS devices would be sold for China Mobile networks in China. It's the world's largest mobile network and Apple will offer iPhone 5s and iPhone 5c for the market. And yet by the accounts of many analysts, this China Mobile deal may be something just short of disaster.

Can Apple learn China about quality?

The word "premium" is a curse. Here are a couple of examples of the many posts:

At Forbes, Mark Rogowsky warned that Apple can't make it selling expensive units.

Instead, Apple is likely to reap the benefits of simply selling more pricey phones through more carriers in its current fiscal year. While China Mobile won’t help this holiday quarter, it will likely help smooth some of the seasonality that has recently seen Apple revenues fall off significantly into the new year. (The China Mobile rollout coincides with Chinese New Year, not a big time for gift giving, but the exchange of money is common. And with excitement over the iPhone, initial response is likely to be strong.)

From here, Apple is back at a crossroads. It can continue pursuing its current premium-price course, with the risk that a maturing smartphone market makes even that unsustainable.

Over at CNN Money, David Goldman said that without a low-cost iPhone, Apple won't make a mark in China.

Apple CEO Tim Cook has discussed gaining a stronger foothold in China as a major priority for the company. The China Mobile deal will help Apple accomplish that.

But unless Apple changes its strategy and offers a low-cost iPhone for the Chinese market — something the company has proven unwilling to do — it's unlikely that Apple would become a top Chinese smartphone player.

However, all of this fretting by business analysts misses the mark: Yes, Apple is the high-end play with mobile devices and with its computer lines. This is the brand, as the marketeers say. But it's also strategic.

In a post to the Monday Note blog, Jean-Louis Gassée said that mobile carriers in the U.S. and Japan have followed Apple's "slow-but-steady, surround-from-below approach" and that China is now following the pattern.

Apple is master of the slow-but-steady, surround-from-below approach. First, sign up a weaker player who will accept Apple’s stringent control in exchange for the opportunity to take business away from the dominant player who balks at Cupertino’s terms. After enough customers have switched to the smaller competitor, the market leader changes its mind and signs up with Apple — on Apple’s terms.

This only works if – and only if – the iPhone is a great salesman for the carrier. Apple extracts a higher price for its iPhone for two reasons: strong volumes and higher revenue per subscriber compared to other sets.

Gassée then quotes analysis by Asymco founder Horace Dediu about the differences between the iPhone and Android customer. He says that Apple customers are better customers in that they use their phones more, browse more and pay more for services. This demand leads to greater network investment by the carriers.

If there is no additional browsing then there is a far smaller economic incentive to network operators to invest in infrastructure. It is this link between usage and revenues which I hypothesize drives operators to carry, subsidize and promote the iPhone. And the resilience of this link indicates that it still works.

If there is something to be concluded it’s that not all usage is created equal. The data regarding how apps and ads are consumed is consistent with a qualitative difference between iOS and Android. This data is more of the same.

It’s something of a cliché to say that audiences vary in terms of quality, but that does not make it less true. Indeed, network operators depend on it being true. And so does Apple.

And it is true. Apple customers have always done more with their computing devices, such as creating or editing content, not just reading or viewing. They purchase more software and use that software. This was so back in the days and it's true nowadays.

As I mentioned in a post this year, Paul Krugman is (finally) wrong about something: Apple Macintosh, PC analysts have internalized the commoditzation of the PC market over the past 15 years and made this the highest value. In this viewpoint, all computers are alike and the cheaper the better. And there's no point in buying a more-expensive brand. What was true for computers is the same with mobile devices.

But behind the scoffing, we can sometimes see a bit of envy. For example, in his Anandtech holiday review of the Best Tablets of 2013, Jarred Walton said: "For the budget conscious, let's be frank: Apple isn't for you. “Budget” and “Apple” are like oil and water – they don't mix."

I'll be honest here: I'm not devoted to the Apple ecosystem by any stretch of the imagination, but mostly that's because I tend to gravitate more towards the affordable end of the spectrum. That said, if money were no object, I'd go out and buy the iPad Air 32GB or maybe even 64GB.

In my opinion, the combination of SoC, industrial design, display, performance, and other features makes it the best current tablet on the market. That's not to say that I don't like Android options, but as someone that has never actually owned an Apple product other than a 4th Generation iPod Touch, I still envy those that apparently can afford the latest and greatest Apple smartphones and tablets.

Need some help understanding the difference between Apple and the rest of the industry, between their takes on their customers and the solutions they provide? Take a look at their holiday season television campaigns.

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