China Unicom Strikes iPhone Deal

By LORRAINE LUK and AARON BACK HONG KONG -- China Unicom Ltd. clinched an exclusive deal to sell Apple Inc.'s iPhone in China, bringing the popular device to the world's largest mobile market in terms of subscribers. The country's second-largest mobile phone operator after China Mobile Ltd. said it has signed a three-year agreement to purchase iPhones from Apple on a wholesale basis. The two companies' deal doesn't include revenue sharing. China Unicom hopes the iPhone will give it a long-sought competitive edge over its larger rival, China Mobile, allowing it to attract an elite customer base in Chinese cities, where cellphones are often status symbols. China Unicom had 141 million users at the end of July, compared with 498 million for China Mobile, the most of any carrier in the world. China Unicom offers third-generation mobile services based on the wide band code division multiple access technology widely used in Europe and Asia. China Mobile is saddled with a less-mature, domestically developed 3G mobile standard. Nonetheless, it is planning to roll out several high-end phones to vigorously compete for 3G market share. On Monday, Taiwanese phone maker HTC Corp. announced plans to launch seven 3G phones with China Mobile, including at least one running on Google Inc.'s Android operating system. China Mobile has also announced plans to release 3G phones with international partners such as Nokia Corp. and Samsung Electronics Co. China's third major wireless carrier, China Telecom Ltd., is in talks with Research In Motion Ltd. to offer its Blackberry handsets in China, and with Palm Inc., maker of the Palm Pre handset. China Telecom had 42 million wireless users at the end of July. China Unicom Chairman and Chief Executive Chang Xiaobing said at a news briefing that the company will offer two versions of the third-generation iPhone in the fourth quarter. Mr. Chang said China Unicom will offer subsidies to customers who buy the handset, lowering its price, but didn't elaborate on the level of the subsidy. The phone will boost China Unicom's average revenue per user, said the executive. The company's mobile average revenue per user fell to 41.7 yuan in the six months ended June from 43.6 yuan a year earlier. Investors are eagerly anticipating details on pricing for the phone and the service package, which weren't disclosed Friday. Mr. Chang said the phone will be sold with its Wi-Fi Internet function disabled, which is required by Chinese regulations. Apple spokesman Alan Hely confirmed the deal with China Unicom, but declined to give further details. It remains to be seen how much of a hit the iPhone will be in China. China's unique, character-based language means user interfaces popular in Western countries don't always catch on with local users. There is also already an underground market for iPhones in China, which are hacked to enable them to work on any network carrier. Beijing-based research firm BDA China Ltd. estimates that there are 1.5 million such iPhones in China already. The iPhone deal comes alongside the rollout of China Unicom's new 3G network. Mr. Chang said Friday that the official commercial launch of the network will be on September 28, covering 285 cities. It plans to expand its 3G network coverage to 335 cities by the end of this year. China Unicom Executive Director and President Lu Yimin said the company aims to take more than one-third of China's 3G mobile market next year, adding the company expects 3G users will make up 20% of China's mobile market in 2010. China Unicom's announcement on the Apple deal came as the company said its first-half net profit fell 45% from a year earlier, dragged down by a decline in its fixed-line business and intensified market competition. Net profit for the six months ended June 30 fell to 6.62 billion yuan ($970.4 million) from a restated 12.09 billion yuan a year earlier. Revenue fell 6.3% to 76.32 billion yuan from a restated 81.46 billion yuan a year earlier. Chief Financial Officer Tong Jilu said the company expects its net profit to stabilize in the second half on stringent cost control and continued growth in mobile revenue. The company restated the year-earlier figures to reflect its merger with fixed-line operator China Netcom Group Corp. in October. Write to Lorraine Luk at lorraine.luk@dowjones.com and Aaron Back at aaron.back@dowjones.com