Apple services censored in China where devices flourished

When it comes to many of Apple Inc’s latest services, iPhone users in China are missing out. Podcast choices are paltry. Apple TV+ is off the air. News subscriptions are blocked, and Arcade gaming is nowhere to be found.

For years, Apple made huge inroads in the world’s most populous nation with hardware that boasted crisp displays, sleek lines and speedy processors. It peddled little of the content that boxed US internet giants Google and Facebook Inc out of the country. But now that Apple is becoming a major digital services provider, its struggling to avoid the fate of its rivals.

Apple services such as the App Store, digital books, news, video, podcasts and music, put the company in the more precarious position of information provider(or at least overseer), exposing it to a growing online crackdown by Chinas authoritarian government.

There’s a headwind around services there, and it’s unclear what services can be available, said Gene Munster, a veteran Apple analyst and co-founder of Loup Ventures. It points to an issue with China more broadly with how U.S. companies can operate there, and it will likely remain a headwind on Apple services for a long time”

While standard iPhone services like iMessage work in China, many paid offerings that help Apple generate recurring revenue from its devices are not available in the country. That includes four new services that Apple announced this year:TV+ video streaming, the Apple Card, AppleArcade and the News+subscription. Other well-known Apple services cant be accessed in the country either, including the iTunes Store, iTunes Movie rentals, Apple Books and the Apple TV and Apple News apps.

This is a concern for investors because Apple is relying on services to power future revenue and profit. If the company cant sell these offerings in the worlds large internet market, it will be harder to keep growing. About 10 per cent of Apples services revenue comes from China, while the country accounts for roughly 18 per cent of iPhone sales, according to Dan Ives, an analyst at Wedbush Securities."The missing puzzle piece for services is China, headded. An Apple spokesman declined to comment.

Older services, such asthe App Store, Apple Pay, and Apple Music are available in China. So is iCloud, but, unlike in other countries, it is operated by a local provider backed by thegovernment, giving authorities greater access to Chinese user data.

Other Apple apps are in the country, too, but sometimeslack features offered in the rest of the world. When an iPhone ownerin mainland China opens ApplesPodcasts app, theexperience is far more limited. Search resultsturn up a fractionof the podcasts available globally. And Categories, the easy way to find podcasts that fit users interests, are nowhere to be found.

Over the past year, ApplesWeather applost its ability to show air quality index, orAQI, data for Chinese cities regardless of the user’s location. AQI is an important metric given high levels ofpollutionin many areas of the country. AQIsupport for China was announced at Apples developer conference in June 2016, and users started reporting that the feature stopped consistently showing data for Chinalast year. Recent Bloomberg tests confirmed that the information isnt available forChinese cities such as Shanghai, while it continues to work forother supported regions, includingthe U.S., Indiaand parts of Europe.

Air pollution is a sensitive issue for Chinas government. It has made sweeping efforts to improve the situationbut has alsoblocked some air-quality information online, including one episode in 2014 that was reported by the Washington Post.

AQIdata for the Apple Weather appcomes from the Weather Channel, a unit of International Business Machines Corp.Apple removed the information for Chinesecities after the Weather Channel changed how it collects the data in the country, according to a person familiar with the situation. The Weather Channel used to getAQI information on the ground in China, but now collects it via satellites, which isless accurate, said the person, who asked not to be identified discussing private deliberations.A spokeswoman for the Weather Channel didnt respond to a request forcomment.

Greater China became Apples second-largest region in the 2015 fiscal year, generating $59billionin revenue. Chief Executive Officer Tim Cook visits frequently and the company employs about 10,000 peoplethere directly. More than a million otherworkers assemble Appleproducts in the country for Foxconn and other Apple manufacturing partners.

Chinas first major move to limit an Apple service happened in 2008, when the companysiTunes Music Store wasaxed in the region.In 2016, iTunes Movies and iBooks, the former name of Apple Books, were blocked in China.This wasnt so much of an issue when iPhones were selling welland revenue wassurging.

But more recently, iPhone sales have slowed and the company switched some of its focus toservices. This is a $46billion-a-year business now, and Apple expects it to be a major source offuture growth, topping $50 billion a year in 2020. So Apple has a lot more at stake as China continues to crack down on online activity.

Apples $50 Billion Dilemma:Listen to Bloombergs Decrypted podcast here.

TheApp Store, Apple’s most lucrative services business, has been particularly affected in recent years. The company has been forced to remove several apps from the App Store in China, including the New York Times and Quartz news apps. The governments media control and censorship is likely why Apple’s own News app, launched in 2015, is barred. The company’s News+subscription service, rolled out this year, isnot available on Apple devices purchased in China, and the app loses its functionality for users from other countries who travel there.

Apple has also pulled hundreds of VPN apps that helped users evade Chinas Great Firewall and access banned Western internet services such as Facebook,Google and Twitter. In the second half of last year, Apple removed634 apps from its App Store due to take-down requests. More than80 per cent of those were in mainland China, according to Apples latest transparency report. Each app that disappears is a lost revenue opportunity. When iPhone and iPad users pay to download apps, Apple takes a 30 per cent cut. And when consumers make in-app purchases or sign up for paid app subscriptions, the company takes a cut too.

Last year, the Chinese government slowed down Apples ability to approve new video games for the App Store, and this contributed to asales decline in the region. Chief Financial Officer Luca Maestri said in January that the issue was affecting our business. Apple’s Arcade gaming subscription service would likely be hard to pull off in China given this tortured approval process.

On its fiscal fourth-quarter call last week, Cook was more upbeat, saying Apples services business in China grew at a double digit rate. But his comments showed how much the company relies on Chinas government for digital services like this. We began to see more gaming approvals in the quarter, or I should say some key gaming approvals. It’s not all about quantity, but about which ones, he added.

A few weeks earlier, one of Apple’s App Store decisions sparked a rare rebuke from the Peoples Daily, amouthpiece of Chinas ruling Communist Party. Apple was excoriated by the newspaper for approving an app called HKmaplive that let users monitor Hong Kong police activity to stay safe in the midst of democracy protests in the city.

People have reason to assume that Apple is mixing business with politics, and even illegal acts. Apple has to think about the consequences of its unwise and reckless decision, the paper said. Apple and other corporations should be able to discern right from wrong. They also need to know that only the prosperity of China and Chinas Hong Kong will bring them a broader and more sustainable market.

Soon after, Apple removed the app, saying it violated local laws and endangered law enforcement.

The paper also said the song Glory to HongKong, which has become a rallying cry for pro-democracy demonstrators, had reappeared on Apple Music. Soon after, the track was unavailable on Apples service, in addition to Spotify.

Even Apples new TV+ video service has felt the influence of Chinas censorship. BuzzFeed recently reported that Apple told show creators to avoid portraying China in a poor light. The TV+ offering launched Nov. 1 in more than 100countries, but not in China. Apples new credit card is only available in the US, but would also be a hard sell in China given the dominance of local payment providers like Alipay and WeChat.

Still, some analysts are optimistic about the longer-term outlook for Apple services in China. At some point, it will be economic forces that drive access to Apple services, and that will be a major boon for Apple along with other companies that are currently restricted from access to China, said Ivan Feinseth, chief investment officer at Tigress Financial Partners. You can only hold back access to information for so long.

Apples App Store and other services have so much potential that the company can also keep growing with limited access to Chinese consumers, he added. They have barely scratched the surface of penetration into their almost 1 billion iPhone installed user base globally, and even if you exclude China, there is still a tremendous market, Feinseth said.

For a few years, Apple highlighted Chinese features when it announced major new versions of its iOS and macOS operating systems. At its 2012 annual conference for software developers, Craig Federighi, Apple’s software engineering chief, said, Its going to be important, get your apps ready for China, during a presentation slide dedicated to new China features.

That year, iOS 6added support for Baidu web search and the micro-blogging serviceSina Weibo, in addition to new text-input features. 2013s iOS 7came out with a Chinese-English dictionary, handwriting recognition and support for Tencents Weibo service. A year later, iOS 8 had turn-by-turn maps for China and the lunar calendar.

Apple has not promoted China features as much in recent years, but it is still adding some iOS 10 in 2016 added the air-quality-index data that have now been removed. The following year, iOS 11 came out with QR code scanning. This year, Apple upgraded that QR feature, improved the handwriting keyboard and added a new Junction View feature to its Maps service for improved local lane guidance on complicated highways.

To keep growing in China, Apple will either need to get more of its services up and running in the country or find its next hardware hit beyond the iPhone.

The company still has an opportunity on hardware there, especially for future iPhone models, the AirPods, Apple Watchesand other wearables, Munster said.

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