SMARTPHONES: Apple Goes to War With China’s Pirates

Bottom line: Apple’s new drive to sell legal music, books and video in China stands a reasonably good chance of success, banking on consumers’ growing willingness to pay for such products if they are convenient and affordably priced.

iTunes comes to China

Following the record-breaking debut for its iPhone 6s models, tech giant Apple (Nasdaq: AAPL) is taking a big new risk by attempting something no one has done yet successfully: making profits from selling legal music and movies in China. The move was part of a newly announced major expansion of Apple’s online store in its second largest global market. But while Chinese consumers have shown a big willingness to pay huge premiums for iPhones, it’s far from clear they’ll do the same for movies and music that they can usually download for free.

Apple sold a record 13 million iPhone 6s models worldwide in their first weekend on sale, easily beating the previous record of 10 million for the iPhone 6 models. China was an important factor in achieving the new record, since the iPhone 6 wasn’t available here during the first weekend of its global launch due to technical reasons. Apple hasn’t given any individual country figures yet, but it’s probably safe to assume it sold at least 3 million of the new iPhones in China during their opening weekend.

Now Apple appears to be taking advantage of that momentum by announcing this major new expansion of its online China store. Apple’s online app store has been available in China for quite a while to support its iPhones. Now the company’s millions of fans will also be able to buy music, books and movies through new editions of Apple’s signature Apple Music, iTunes Movies and iBooks online stores. (company announcement; Chinese article)

The new shops will contain a mix of both international and local offerings, Apple said, adding that China is already its biggest global market for downloads. That latter fact is slightly surprising, since the US is Apple’s largest market and thus should also be its biggest market for downloads. But Chinese probably spend more time on their smartphones than their US peers, and they also love to try out all the latest free apps that are constantly hitting the market.

That brings us to the next point, which is whether Chinese consumers will be willing to pay for any of these new products. Apple Music will cost a subscription fee of 10 yuan per month, or about $1.50, and versions will be available for users of both iPhones and smartphone using the Android operating system. Movies from the iTunes store will be available for rental at 5 yuan ($1) apiece, and for sale at 18 yuan ($3). The price for paid books will also start at a very modest 0.5 yuan apiece.

Price Sensitivity

Apple obviously realizes how price sensitive Chinese consumers are, and has deliberately set the prices for its new offerings quite low. The China market for paid online books is already well developed, with global giant Amazon (Nasdaq: AMZN), and local giants Dangdang (NYSE: DANG) and (Nasdaq: JD) all doing relatively brisk business. But it’s less clear if Chinese consumers will be willing to pay for music and videos that they’re currently able to get for free.

Apple wouldn’t be the first to try and sell legal copies of music and video. Most of China’s online video sites like Youku Tudou (NYSE: YOKU) already offer such products, but all are also losing big money on the business. Online search leader Baidu (Nasdaq: BIDU) also has a legal online paid music service, but hasn’t gained much traction and is reportedly looking to sell its entire music unit. (previous post)

Apple has a reasonably good record of doing well where others have failed, including the success of its original iTunes music store, as well as its early iPod music players and now with iPhones. But it has also produced a few duds, such as its Apple TV. In this case it does seem like many Chinese may be ready to pay for better quality movies and music if they can buy those products easily and affordably. Apple seems to have addressed most of those issues, and thus I would give this initiative a better than 50-50 chance of success.

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