This post is a speculation from my experience of an Android phone I think from Saudi Arabia.
I am speculating that Apple is going to have a much tougher time in China than anyone imagines.
To see why you need to go back to my original Samsung Desire HD - which I blogged about in June 2011.
I purchased this phone on Ebay and it came shiny and new in a white box, however the operating system was dodgy. It had a limited choice of language - Arabic, English (UK), Farsi, Urdu.
Most importantly it did not contain any access to the Google market place (Google's equivalent of the App store). It had limited apps and no possibility of adding more. It contained a non-standard web browser and a non-standard email client (leaving open the possibility of the State watching what I wrote and said). It was not possible to put a Voice over IP app on it. That phone was almost useless - a smartphone without apps. The smartphone of an oppressive regime.
The solution was to root it and load something great (insanely great even). I loved that phone until my wife put it through the washing machine.
Saudi Arabia (or whatever Middle East state it was) could demand smart-phones that were neutered because - well - they had a copy of the source code for Android and could demand and implement any changes they liked. Open source is a force for good or evil and in this case it was evil. Google could distribute "good Android" and the oppressive authorities could force their phone companies to distribute "bad Android". There will always be an elite who can root their phone and load CyanogenMod or similar - but that will be an elite.
Will this be the oppressive phone of China?
My guess is that will suit China just fine. The phone companies are controlled by the State and they will sell handsets controlled by the State.
You can't really do that with Apple. Apple is not open source and there is no root operating system that an oppressive state can modify to suit their whims. So the State needs to lean on Apple to do their evil work for them - and that doesn't work brilliantly. Apple is not going to give away its secrets and the Chinese state will demand more and more.
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So I am assuming that if Apple goes mass-market in China it will sell systems with enough "apologies" to the cultural differences of China. Those "apologies" will make a rooted Android massively superior to a botched-up Apple. The elite will want their Samsungs... Some bulls on Apple and China may be just flat wrong...
Just a speculation...
J
Postscript. The WSJ comes to a similar conclusion.... The key observation - Android in China comes without an App Store as per my Saudi phone... Here is the quote:
Ironically, Google's Android mobile operating system dominates the smartphone market in China, despite the company's strained relationship with the government. But those devices don't come with Google services that are standard elsewhere, such as YouTube, search, and Google Maps. Also, without access to the Google Play store, Chinese users have a weaker selection of apps to choose from.
Posting about Apple. Are you bored?
ReplyDeleteNo. Been an Apple bear (but not short) for a long time.
ReplyDeleteDiscussion around here is when do we buy it.
We listed out all the nasty things we could think of - and when they were all in the market we were likely to buy it.
They are not all in the market.
Apple seems to be the largest zero free cash flow company no one talks about... given that, and a book value at a fraction of its market value, I don't see how you get comfortable w/ valuation. The back of the envelope value where I would think about buying it is 1.5-2.0 book value... 40% lower.
ReplyDeleteBut I'm more of a spec sit / distressed buyer...
Apple has 40bn in cash, and there cash has consistantly grown over the years. Not quite following the zero free cash flow...
ReplyDeletewhy are you so worried about Apple's mass-market phone when it doesn't yet have one?
ReplyDeleteWhy not the best of both worlds? A friend recently came back from China with a shiny new dual-SIM phone running Android that is a perfect physical replica of an iphone5.
ReplyDeleteNo Lightning connector of course, just good old microUSB and microHDMI. (In that respect it is far better than an iphone5)
It is quad band GSM with 3g data for just $200 and that was the rip off Westerners full retail price.
Massive profits for the handset makers in China? Not going to happen. Not with devices like this available all over the place.
wake up, john
ReplyDeletethe state does not need to fk with your phone root just to eves drop on you -- they can do it just like that
and, as a matter of fact, anyone can
Didn't you learn your lesson on anecdotal speculation regarding the Chinese consumer with Richemont? What was that, like a mere three months ago? John, I love you so I'll offer some advice - stick with what you're good at.
ReplyDeleteWhat % of Chinese will be comfortable with unlocking bootloaders + flashing ROMs, kernels, radios?
ReplyDeleteAn even better question is whether the Chinese gov't and carriers will allow most phones to have unlockable bootloaders. Due to using multiple + different LTE standards at the carriers, as LTE becomes popular in China phones will become carrier-locked, as in the U.S. Therefore carriers - whether for business or government reasons - will have "customized" phones, and can order bootloaders to be un-unlockable like Verizon with some of the Motorolas.
Makes more sense to eavesdrop and monitor digital comms centrally at the mobile phone company. The data will be routed through there, so it is easier to install on the switches than on the phone. Only exception is data actually stored locally on phone but never transmitted. My guess is Saudis are clumsy but China won't be.
ReplyDeleteA few comments...
ReplyDelete(a). It makes sense to monitor phone calls centrally - but then you want to control the over-the-top services like Skype because you can't easily monitor them centrally.
That is why my Arabic phone did not allow VOIP clients.
(b). There is a difference between the phone being unlocked and the phone having an unlocked boot loader. Unlocked simply means can be used on multiple carriers.
I have not seen a phone with an unlocked bootloader from inception from an oppressive country...
J
John, Apple has at least four fundamental problems that make valuation difficult. First, its core technology is extraordinarily dated (google the subject for details)and strong core technologists dont really want to work for Apple; Second and perhaps most important Apple is transitioning from an innovation player to an operational excellence player (like Dell). Platform inflection points like Google glasses (that could easily drive a decade worth of innovations on it as a platform) or driverless car (ditto) are coming from Google and others not Apple. What is rumored to be in the works at Apple (TVs, watches) while potantially interesting do not represent PLATFORM inflection points that drive a decade of profits. Third, the rest of its competitiors are getting much better in design than Apple is in offering services. Thus you will find savvy users using IOS devices but populated increasingly with non Apple services (generally from Google). Finally, its OK to claim vision on items consumers dont yet know they want. You lose some (Newton, Lisa, etc) and you win big some (ipod, iphone, itunes etc). But to claim consumers are wrong when they demand things such as larger screens suggest that not only has Apple gotten "stupid" post Jobs on the innovation front but they have also gotten arrogant. The combination can be deadly as Cook will undoubtedly find out. Take Apple's cash and look at it after US taxes, and then 2x forward earnings might be interesting but even then maybe not. And I say this as a full Apple user at home (though not sadly enough at work)
ReplyDelete"The solution was to root it and load something great (insanely great even). I loved that phone until my wife put it through the washing machine"
ReplyDeleteHey John, if you rooted your phone, it's no wonder your wife left your desire in your trouser pocket.
But seriously you left your phone in your pocket didn't you.
A few comments here. 1) Huge amounts of apple products flow over the border from Hong Kong into China. There is a healthy amount of second hand and new products make it over and the operators in Hong Kong sell them unlocked. Whenever apple release a product in HK they vanish from official channels and appear in the grey channels in the small malls.
ReplyDeleteThe iTunes Store blocks certain apps being sold in certain countries. for instance there are lots of apps available n the USA which can't be bought in Australia unless you have a US credit card and mailing address. China shouldn't have a problem blocking here.
Another one I experienced was that certain networks can block functions such as tethering and VoIP on iPhones.
Vijay, spoken like a true Google troll / employee. That said, being a troll / employee doesn't invalidate your points, so here we go...
ReplyDelete1) Extraordinarily dated technology = Yawn. That's your opinion. Betamax had better technology too.
2) Strong core technologists don't really want to work for Apple = Yawn. That's your opinion. Show some evidence of that. They also don't want to work at Google -- they're working at a university or at Facebook or at some start-up aiming to eat a bigger guy's lunch.
3) Google Glasses / Driverless Cars = could be cool, could be flops, who knows. Both are very interesting concepts though. Apple doesn't take the covers off its prototypes until they're ready for primetime though, so what do you really know about what else is up Apple's sleeve?
4) non-Apple services better than Apple services = yep, you're right. But so what? Who cares? What company do you know provides all products and services to customers? Does Coca-Cola make the best hamburgers? If you're arguing iOS is worthless, you better be sure you're seeing real evidence of that in the marketplace as opposed to what you *think* you're seeing.
5) Arrogant Apple = yawn. Nothing like anthropomorphizing a Company to suit your fantasy. To top that off, you're applying some recency bias based on what you read in USA Today about Apple in China.
6) 2x ex-cash P/E = Keep dreaming.
I like the anecdata about phones from oppressive regimes. Interesting, believable and fits my prejudices. The overall scenario about Chinese regime phone requirements is also believable.
ReplyDeleteIt seems that you are arguing that the iPhone would be less attractive to the elite than an Android phone, because the Android would be easier to root. This seems very speculative, every iPhone and iOS version gets rooted shortly after it comes out.
However...
- As un-rooted, mass market phones, it seems like iPhones might well beat Androids, because both would be running the oppressive systems, but probably Apple would make a nicer one.
- Perhaps shops would mass-root mass-market phones. This seems pretty consistent with what I hear about retail in China, but I'd be very interested in your opinion. Given that this is a "break once, root everywhere" proposition, I expect that both Android and iPhones would be rooted about as much -- how much, I don't know.
- A stronger determining factor, it seems to me, is whether Apple can or will build an iPhone that is mass-market competitive with the Android phones. I would guess that Apple would not get down to the price level, or up to the volume level, to be truly mass-market in China.
John, you should run Apple's DCF on zero growth. The stock is will undervalued. They don't have to sell anything in China for the stock to be a buy
ReplyDeleteJohn your argument is an interesting one, and I've seen it made by hackers before, but it cuts both ways. Why wouldn't the elite continue to purchase iPhones if they trust it to have a boot rom without backdoors? In extremis they'll import them from abroad.
ReplyDeleteThat leaves the mass market to Android of course but Apple cannot reach that in China, India and so on at $650 anyhow.
I think Apple is negative growth. I know at zero growth the DCF is fine.
ReplyDeleteI want to work out how negative growth...
I still want to own it --- at a price.
Very interesting when two people I highly respect, Hempton and Damodaran, come to such different conclusions. The latter has AAPL valued at around $600 a share.
ReplyDeleteYou just overestimate importance of Chinese market. Do your assessment without looking at this..fundamentaly google is long and apple is short. In my view google is Microsoft in 90xx and apple is..apple..it will lose its relevance soon. How soon I do not know :) so I would avoid taking any investment positions in these two stocks...purely for the reason it is extremely difficult to time it right...too much of a gamble. Short RIM (despite their BB10 is very advanced) and MS... It is easier bet.
ReplyDeleteI understood that analyzing companies is a way more difficult to analyzing countries... the easiest investment opportunity of last year was go long BTPs while they were depressed. I could only blame mine laziness that I did not use it :) for individuals it takes a bit of effort to take a position in a bond market even if you have absolute certainty in the outcome..I am simply preferred spending time in a pub with my friends than spending time to take an obvious directional bet...too much effort specifically if you work in financial industry with associated restrictions on trading on your personal account..I hope you took that opportunity to full extend for your clients :) still European situation left a lot of opportunities to profit more easily than analyzing prospects of technology companies...I am biased as equity world is alien world for me..
ReplyDeleteFor reference I am not short Apple. We discussed it extensively at Bronte but did not pull the trigger.
ReplyDeleteI am trying my best to work out what price to buy it - but I keep running nasty bear theses around in my head.
The same bear theses I had at $600 and later at $700. But still a decent bear case.
J
Could backfire... the Chinese love their bling and don't trust local brands, if AAPL is seen as the counter-repression phone, the people with disposal income might see it as even more desirable.... unless the government outright bans or screws with it a la Google, makes it seem unpatriotic to own one. Sort of ironic actually, that the Chinese would make the Google-originated device the go-to patriotic phone.
ReplyDeleteWhy on earth did your wife use the washing machine to clean your phone?
ReplyDeleteI shall never understand women!
And then, we are bound to have even more small print disclaimers on the instructions for use...
"The key observation - Android in China comes without an App Store as per my Saudi phone... "
ReplyDeleteThis is wrong and misleading. You seriously underestimate the sophistication of China's Internet management.
It is wrong because Android in China does not have the *Google* app store (Google Play). Android phones in mainland China do have app stores, just different ones, controlled (and censored) by the manufacturer.
It is misleading because all apps need to be rewritten for the Mainland market anyway. There are the obvious things, like language. There are the less obvious, like maps/GPS. Mapping is about converting a 3D object (earth) onto a 2D plane (map). China has a different standard to the rest of the world, so every app that uses mapping requires a major re-write.* In the near future, there may well be a requirement to use China's COMPASS satellite system too.
These factors were a major problem for Google until they decided to pull out of Mainland China.
The effect on Apple is that they do not have the head start they had in most other markets. Everybody has had to re-write everything for China so it's a more level playing field. You are right to identify that Apple's problem is that their core UX target is the US, and the China releases have lagged behind. Android manufacturers have been able to respond more quickly to developments in the Chinese market. Apple now seems to realize what an issue this is and seem to be responding according to this week's China Telecom leak.
In the long term, the Sixth Plenum in 2011 established better control of Internet content as a major medium-term objective for the Party.** Google have already found this incompatible with their core values. At some point, Apple may also find they are forced to choose between quitting the China market and handing over control of the App Store/other core technologies (remember the Green Dam fiasco? they will try again). I don't know enough about Apple to predict their decision but they will have to make it one day.
*Techie explanation: http://www.sinosplice.com/life/archives/2013/07/16/a-more-complete-ios-solution-to-the-china-gps-offset-problem
**http://www.bloomberg.com/news/2011-10-26/china-s-communists-vow-to-strengthen-management-of-internet.html