China's smartphone market grows 164%, Apple's iOS takes 17.3% share

Needham & Company analyst Charlie Wolf's quarterly report on the smartphone industry was issued on Monday, and identified the "big news" of the quarter as the emergence of China as the leading smartphone market. Smartphone shipments in China grew 164 percent year over year to 33.1 million units in the June quarter, topping the 25 million units sold in the U.S.

Among mobile operating systems, Apple's iOS took a 17.3 percent share according to data from Gartner. Much of its growth from 9.9 percent a year ago stems from the launch of the iPhone on China Telecom this year.

But while Apple has deals in place with both China Telecom and China Unicom, the company has yet to forge a partnership with China Mobile, the largest wireless provider in the world with more than 650 million subscribers. Reports have suggested that Apple's next iPhone will add compatibility with China Mobile's proprietary wireless network.

Apple's 17.3 percent share in China was well behind Google's Android platform, which dominated with 69.5 percent of smartphones sold in the country. Apple took second place, while Nokia finished in third with an 11.2 percent share.

"The surge in China can be traced in part to the introduction of smartphones at materially lower prices that made them competitive with feature phones," Wolf wrote. "A material percentage of these sales were captured by second-tier Chinese manufacturers."

In his latest note, Wolf also tackled the issue of iPhone carrier subsidies, through which carriers pay for a majority of the cost of an iPhone sale by locking customers in to a two-year service contract. Some carriers have expressed interest in reducing their iPhone subsidies and passing more of the cost of an iPhone sale on to the customer.

Wolf said that while the argument for reducing subsidies for the iPhone may be "seductive," he also believes it's "irrelevant." He believes that the carriers earn more on iPhone sales than they do on sales of competing smartphones with smaller subsidies.

"iPhone owners are more active users of the carriers' networks and generate the highest ARPU rates," he wrote. "Second and more importantly, the iPhone is an iconic brand that virtually sells itself, translating into a subscriber acquisition cost that is far lower than the SAC on competing smartphones."