CUPERTINO BUSINESS REPORT
Knives Out for the iPhone

A new iPhone model could appear as early as next month, but Apple's (Nasdaq: AAPL) rivals are busy making plans to grab their share of this summer's smartphone spotlight.

In a move that could wound Apple's hopes of penetrating the Chinese market, China Mobile, the world's largest wireless carrier, is reportedly coming up with its own Android-based challenger to the iPhone.

In the U.S., Sprint (NYSE: S) and Palm (Nasdaq: PALM) plan to debut Palm's supposed iPhone killer, the Pre, on June 6, two days before the Apple Worldwide Developers Conference (WWDC) kicks off in San Francisco.

Meanwhile, Microsoft (Nasdaq: MSFT) is targeting the enterprise market, which Apple is just beginning to tap, with its Windows Mobile platform.

The One That Got Away?

With more than 477 million subscribers, China Mobile is the largest wireless carrier in the world. To put that in perspective, the U.S. Census Bureau estimated the population of the United States at 304 million for 2008.

The Chinese carrier added more than 7.3 million subscribers per month on average, according to its 2008 annual report. Its 2008 revenue was up 15.5 percent over 2007's figures. Its net profit was up 29.6 percent year-over-year.

China Mobile is catching the wave of the country's growth into cellphones, but Apple's well-known insistence on doing business on its own terms may have cost it a chunk of this prize. Talks between the two to begin selling the iPhone in China (in an official capacity -- gray market iPhones can be bought, cracked and used there) reportedly broke down when China Mobile balked at Apple's terms. Apple is now said to be in talks with China Unicom.

With almost 138 million subscribers, China Unicom is a sizeable wireless carrier by any means. It takes a China Mobile to make it appear small. Unlike China Mobile, however, China Unicom saw 2008 revenue fall by 0.8 percent over 2007's figures, and its profit slipped 5.8 percent from 2007 levels.

That might mean Apple would be in a similar situation in China as it is in the U.S. with AT&T (NYSE: T) -- stuck with a carrier that's not the biggest player in the market. This could impede its growth in China as it has in the U.S., and making the same mistake twice could raise investors' concerns.

The O-Phone Cometh

The apparent impasse with Apple has led China Mobile, long a member of the Open Handset Alliance, to begin work on an iPhone killer.

A device dubbed the "O-Phone" reportedly has an operating system based on China's OMS, or Open Mobile System, standard. OMS is basically a combination of Android and TD-SCDMA, China's home-grown 3G standard.

TD-SCDMA, or Time Division-Synchronous Code Division Mutiple Access, was developed by the Chinese Academy of Telecommunications Technology, several mainland Chinese telecommunications companies, and Siemens (NYSE: SI).

"China Mobile is concentrating on promoting the O-Phone," Kevin Wang, director of China research for iSuppli, told MacNewsWorld. It's not yet clear, however, when the device will be released on the market.

Google (Nasdaq: GOOG) declined to comment on how exactly China Mobile might be tinkering with its platform.

"Since Android is a free, open source mobile platform, anyone can take the Android platform and add code or download it to create a mobile device without restrictions," Google spokesperson Carolyn Penner told MacNewsWorld. "We cannot comment on other companies' products or on industry rumors."

Something's Gotta Give

With the U.S. facing a long, hard recession and more layoffs in the offing, Apple may have a hard time propelling growth in the U.S. market. China, on the other hand, has room for growth.

Apple has pledged to crack the China market this year. In order to do that, it might need to make some changes, either in its pricing model or in its revenue-sharing arrangements -- or both.

It looks as though it will also have to battle the O-Phone, which could have a head start.

It's All About the Money

Another problem Apple faces is the iPhone's price. American smartphone buyers generally sign service contracts to receive discounts on the purchase price of a new handset, though that's not a common practice in all parts of the world. If iPhones were to sell at something like $500 apiece in China, the device would be prohibitively expensive to the vast majority of the population. The per capita income of urbanites in China was just over $2,000 in 2007, according to the country's National Bureau of Statistics, and the rural income was about one-third that figure.

The result is a thriving gray market in handsets. About 33 million handsets will be sold on the gray market within China this year, iSuppli's Wang said, and 80 million will be exported. iPhones reportedly constitute a healthy percentage of the gray market handsets sold within China.

Apple has hinted it may come up with lower-priced models of the iPhone for less developed markets. However, unless it can get carriers to agree to its terms, these phones will end up on the gray market, depriving Cupertino of revenue. And unless they can compete with the features available on the expected O-Phone, buyers may pass them by.

Talk to the Palm

Back in the U.S., the competition is also heating up.

On Tuesday, Sprint and Palm announced that the much-anticipated Palm Pre will hit stores on June 6. The timing could either be a bold attempt to steal Apple's thunder or a desperate bid to avoid being overshadowed by a new iPhone's launch, which is widely expected to take place sometime in the next few weeks.

The Pre boasts several new features, including multitasking and leveraging of social networks.

However, the one thing it lacks is the sizzle factor that made people line up for hours just to buy an iPhone -- not to mention endure the hassle of changing carriers -- IDC analyst Ryan Reith told MacNewsWorld.

Will Windows Mobile Mug the iPhone?

With Windows Mobile 6.5, scheduled to be released on several smartphones later this year, Microsoft may seek to cut off the iPhone's move into the enterprise market.

Microsoft is clearly targeting the enterprise with its updated mobile OS, IDC's Reith said. "It's staking the ground now to play the enterprise role for companies like Sony Ericsson, Motorola (NYSE: MOT) and Samsung, who have decided to take the Android approach," he said. "Android lacks that enterprise capability."

Asked about the future of the operating system, Katy Asher, group marketing manager of Windows Mobile, would not be pinned down. "Customers tell us they want a choice of phones that meet key needs in both personal and business areas," she told MacNewsWorld.

"The next generation of Windows phones will have all the same business goodness that we are known for on top of some new and exciting items that appeal to their consumer side, such as a new UI (user interface) and widgets," she said.