Since April, Apple has faced a series of legal and regulatory hurdles in China that continue to undermine its competitive position in a market that is its second largest and key to future growth as global demand for smartphones weakens.
The most recent case, an infringement lawsuit submitted by a subsidiary of China’s broadcasting regulator, is indeed the most surprising as it dates back to a film first shown in 1994 that is now available on iTunes via a local app firm.
The Movie Satellite Channel Programme Production Centre, part of the State Administration of Press, Production, Radio, Film and Television, alleges that Apple infringed on its exclusive online rights to broadcast “Xuebo Dixiao”, a pro-China film depicting fighting between Chinese and Japanese soldiers in the 1930s, and claims “huge economic losses”. It is also suing the app developer Youku HD.
The production centre wants the broadcast stopped and is asking for CNY70,000 ($10,500) in compensation.
As arbitrary as this new case may seem, previous court rulings against Apple have been just as capricious and no doubt give the US company little confidence that this and future lawsuits will be settled in a fair and unbiased manner.
After years of deliberation, a Beijing court unexpectedly ruled in early May that a local firm is the rightful owner of the iPhone trademark for its leather goods. Xintong Tiandi Technology adopted the iPhone trademark in 2007 for its range of wallets and purses, the year the mobile device first went on sale. Apple has been disputing the Chinese firm’s right to use it since 2012. The decision came despite Apple applying for the iPhone trademark in China in 2005 but it wasn’t approved until 2013. Apple said it is appealing the case to the Chinese Supreme People’s Court.
While that setback involved a small company outside the tech sector, it was far from a one-off. Beijing’s intellectual property regulator ruled in June that the design of some of Apple’s iPhone models infringed on an exterior design patent held by a previously unknown Chinese firm. Shenzhen Baili claimed the iPhone 6 and 6 Plus look too much like its 100C smartphone.
Given that the iPhone 6 and 6 Plus are no longer available in many stores in China and Apple plans to stop production of the models soon, analysts said the impact of the ruling won’t be significant.
Outside the courtroom, Apple hasn’t fared any better. In April the government demanded it shut down its online book and movie services after the country’s video and publishing regulator imposed stricter guidelines on online content.
Although its services businesses is small in China, the shutdown could severely dampen its growth prospect in services, which expanded 20 per cent globally last quarter and represented the company’s second largest revenue-generating category.
These obstacles come at a challenging time for the Cupertino-based company, which in Q1 suffered its first quarterly revenue drop in 13 years. It reported iPhone sales in China declined 8 per cent in the January-March period, and in May its market share in the mainland fell to 10.8 per cent, putting it in fifth place, according to Counterpoint Research.
Apple CEO Tim Cook’s trip in May to meet with high-level Chinese officials in Beijing certainly hasn’t improved its relations with the government in the short term.
The real question is are these seemingly unrelated cases part of a broader policy to curb Apple’s growth after its share of the smartphone market in China hit nearly 18 per cent in Q1 2015?
Many analysts have compared Apple’s experience to Google’s back in 2010, when it was forced to pull out of China because of censorship concerns, but not before it had close to 30 per cent of the search traffic. Over a ten-year period the government had undermined Google’s business by randomly blocking its Chinese website and redirecting traffic to local search firm Baidu.
SeekingAlpha commentator Bram de Haas has suggested that the government has set an undisclosed market share cap for foreign firms. It seems Apple has simply grown too large and now is squarely in the regulator’s crosshairs.
China will of course claim the decisions are unconnected, with the results determined on a case-by-case basis. But if they’re not, Apple’s growth prospects – particularly its main revenue and profit generator, the iPhone – will be significantly lower.
Revenue in greater China accounted for a quarter of Apple’s total turnover in Q1, so any slowdown there won’t be offset any time soon by growth in fast-rising India, where the average selling price for smartphones is much lower than in China and a market Cook said “is where China was maybe seven to ten years ago”.
Shareholders won’t be willing to wait that long for a recovery in growth and its share price.
The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.