China Rolls out 5G Friday, Apple Left Out in the Cold

5G in China

Apple had a fabulous fourth quarter and easily beat the expectations on the street. The 5G iPhone is at least a year away, and in the meantime, China is rolling out 5G now.

In spite of just rolling out a stellar quarterly earnings call, which saw Apple earn $3.04 per share versus the consensus estimate of $2.84, as well as beating revenue expectations, there are some concerns out there about how their taking their time a little too much with 5G, resulting in a risk that their iPhone sales will shrink as a result.

With all the worries out there about the iPhone losing market share to its more reasonably priced and more feature rich competitors, iPhone users are a dedicated bunch indeed, and while they may complain about certain things about the iPhone such as the lack of a headphone jack, they complain and buy it again for the most part.

It is almost like Apple has created a culture that is amazingly immune from competition, where users simply upgrade their phones to another iPhone without even looking at what else is out there.

This is not how economists draw things up, but there’s more to a product than concrete features, there’s also something called brand loyalty, and Apple has crafted a real work of art with theirs, right from the beginning. Economists assume rationality, and this love affair with Apple may not be, but emotion and not rationality is what mostly drives buying behavior.

For the majority of iPhone users, the bond with the brand is so strong that they don’t even shop around. Most are probably not even aware of how the iPhone compares to its competition value-wise, because you have to shop and compare to discover that, not just order the latest version of yours when it is released, and even line up to do it.

This loyalty to Apple and the iPhone will be put to the test in China now, as China rolls out 5G in force. 5G is new, faster, and better, and has been highly touted for a while now. It takes real time to upgrade cellular networks, but the day where this dream will become a reality is now here, at least in China.

Apple is at least a year away from offering the iPhone with 5G, and does not appear to be in any hurry to do it, even though some of their competitors certainly are, to look to gain a leg up on the iPhone for a little while anyway. Chinese competitor Huawei is at the forefront of this, and have enough expertise with it that other governments are worried.

While Huawei’s advanced 5G know-how hasn’t exactly been warmly welcomed in many countries, including the U.S., due to security concerns, they face no such issues in China of course, and are now ready to see their 5G phones being put to use as 5G is rolled out for the first time on Friday.

China Enters 5G in a Big Way, and Leaves Apple Behind

China’s three major cellular networks, China Mobile, China Unicom, and China Telecom will begin offering 5G service in 50 Chinese cities, with the plan to soon offer the service to another 50 cities. The reason why the Chinese have been so much faster to achieve this landmark is due to all the public investment in it, and while cellular companies in other countries are quite capable, they simply don’t have the deep pockets of the Chinese government.

We already are well aware of how near and dear the cellular industry is to the hearts of the Chinese government, and they aren’t just complaining about what they see is mistreatment of Huawei, they also back this up with a lot of spending.

The worry with Apple is that, since they do not offer a 5G phone, they will lose market share in China to phone makers who do. A lot of cell phone users love the latest and the greatest technology, and 5G is certainly a significant step up, and many may even prefer 5G for its novelty alone even though it may not make much of a difference to their experience.

With previous generations, 3G and 4G, we did see an upgrade in speed, but it really wasn’t that significant for most people anyway. We need to realize that downloading large files over cellular networks is something that most people steer well away from, and will do so through Wi-Fi instead. This is the reason why phones are set to only download software upgrades over Wi-Fi normally, and while you can set them to do so anyway, this eats up a lot of precious data quickly.

Download speeds are therefore not as big of a deal with cellular service as we may think, especially compared to how important it is for internet connections. The internet is the network we generally use for this, and is especially the one that we use for files large enough to make improvements in download speed that significant.

Carriers want to hype things up of course and are telling us that 5G will be a whole new world for us, but this is certainly overstated, although you can’t blame them for wanting to put a positive spin and look to build more perceived value at least.

Based upon the concern of speed at least, it is not very likely that there will be a lot of people who may switch away from Apple for this reason. It just isn’t all that significant overall and probably nowhere near as much as it would have to be to file for a divorce from the iPhone, and many users are so dedicated to them that comparing it to a marriage wouldn’t be all that much of a stretch.

There is another issue here though, a bigger one, and one that is aimed squarely at Apple, which is how aggressively priced 5G service is about to become. With the major carriers in China about to slash prices on it, 5G is about to become not only faster, but cheaper.

We’re Making a Bigger Deal out of This Than We Should

The weight of these two things may still not be enough to steer a big percentage of iPhone users toward competitors, especially with those who now have an iPhone in the middle of their term where it would take particularly good reasons for them to ditch them in favor of a new phone made by anyone.

Still though, Apple does rely on new users like every other company does, and does hope to sway users away from other phones and win first-time phone users, although this usually means users too young to buy them themselves, and rely instead on their parents. This is in Apple’s favor though as the loyalty that they have with the parents does carry over very well to their kids.

When we look at how small of a percentage that the Chinese iPhone market represents to Apple, and the fact that most of this will likely be staying put regardless, this really should not be all that big of a deal and nothing that should materially affect Apple’s business performance very much.

This is not anything that took the world by surprise, as we’ve known that China would be going to 5G soon and sooner than anyone else, but knowing this did not cause Apple to panic or even be anxious about it. In other markets that are more important to Apple’s business, the implementation of 5G is proceeding at a slower pace.

A bigger concern for Apple will be the 5G lag that they will experience in other markets such as the U.S. In spite of China’s progress with it, they will only represent about half of the 5G capacity that gets added over the next year, according to Piper Jaffrey. This may be an impressive statistic for China, but the other side of this, all that new capacity elsewhere, during a time where Apple will be sitting on the sidelines, may be a bigger concern for them.

It’s not that Apple’s 5% market share in China is anything to sneeze at though, because the Chinese market is big enough to make this 5% a pretty big number.

The number to look at here is not market share but sales though, and when you have 5% of the market, and people get a new phone every 2 or 3 years, it’s not that the 5% is up for grabs here for their competitors, just the new sales that they can wrestle away.

Unlike their latest earnings call, this is not a win for Apple, but at the same time we don’t want to overreact to it. Apple’s stock has been on a tear since the start of June, and has now moved up 68% in the last 5 months, and this should not take it off its course very much if at all.

The quarterly earnings report and this new concern about iPhone sales in China were served up to the market together, and the net result has been a further 2% gain in the stock, and the 5G issue really isn’t causing any worry in the market at least.

It takes a lot to get someone to want to trade their iPhones in for something else, and give up both their phone and their cellular wedding band, and while this is important, it may not be important enough to carve much of a chunk off of Apple’s iPhone business overall.

This is just not an issue that factors into the grand scheme of things very much, especially when put alongside the other parts of Apple’s business that continue to grow and continue to excite both users and investors alike. Apple has refused to comment on the 5G issue as they probably see it not that worthy of their time, and it may not be.

Eric Baker

Editor, MarketReview.com

Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.