Apple Inc's blowout quarterly iPhone sales in China show that a barrage of bad publicity hasn't dented demand. Now, it has to find a way to sell more smartphones in the world's biggest mobile market, without its fans jumping the paywall.
iPhone sales surged in China after Apple signed up China Telecom Corp to sell the device last month - the second of the country's 'big three' carriers to get the iPhone. The biggest, China Mobile Ltd, which has over 600 million subscribers, doesn't yet have compatible technology.
"Based on what we've observed so far, we've seen a tremendous uptick in CDMA iPhones," said IDC analyst Wong Teck-Zhung. "The key factor is that they signed with China Telecom and expanded their carrier operations."
Apple sells the international 3G standard iPhone through China Unicom and a CDMA version through China Telecom. China Mobile's domestic 3G standard does not have a compatible iPhone version.
Cupertino, California-based Apple has faced a raft of negative publicity in China in recent years, including worker suicides at its supplier Foxconn Technology and accusations from Chinese groups blaming the U.S. firm for environmental pollution, and copyright and trademark infringement.
That page appears to be turning as Apple reported a five-fold increase in iPhone sales in China, Taiwan and Hong Kong in January-March, driving up its greater China revenue to $7.9 billion. Its publicity machine has also been helped by a deal with Foxconn to ensure proper working conditions at its factories.
A next watershed would be a deal to sign up China Mobile to a carrier deal on the iPhone 5, expected to be released to the market in the third quarter.
"The main challenge for Apple is to penetrate China Mobile's 600 million subscribers. The numbers look pretty good now, but would be much better with China Mobile," said Nomura analyst Huang Leping.
With so many iPhones sold, it's natural that China is Apple's second-largest mobile software market by download volumes, according to a report last June by Distimo, an application marketplace analysis firm.
But Apple's challenge is to find a way to stop users hacking into the iPhone's software to download free apps or solicit services from e-commerce sites to download apps at a fraction of their App Store or iTunes Store price.
"Clearly Apple's doing well in China, but could they do better by trying to clamp down on this? Sure, but in the big scheme of things, that's a 'high quality' problem for Apple to have," said Michael Clendenin, managing director of RedTech Advisors.
For its second-quarter, Apple said its iTunes Store revenue increased by more than a third to almost $1.9 billion. Last month, it said its 25 billionth app was downloaded in China.
Apple declined to comment for this story.
"Over the long term, they will figure out a way to handle it," Clendenin said.
Early last year, Global Times, an official Chinese newspaper, reported some 50,000 illegal iTunes accounts were being sold on Taobao, an online unit of Alibaba Group. A spokesman for Alibaba Group said on Wednesday it shut down the accounts of those providing those services because of negative customer feedback and that the move had nothing to do with the legality of the services.
A search by Reuters on China's largest consumer e-commerce platform Taobao Marketplace showed a large number of sellers offering iTunes or App Store gift-cards at big discounts.
Asked about the legality of the service, one Taobao seller who was offering 16,000 iTunes songs for $30 said: "What's illegal? If what I'm doing is illegal, all the books, music and entertainment online (in China) are illegal.
(Editing by Kazunori Takada and Ian Geoghegan)
By Melanie Lee