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China Unicom in 3-year deal for Apple's iPhone

Apple's iPhone will go on sale later this year in China, the world's largest mobile market, but its partner China Unicom may find selling the phone carries its own burdens.

China's No. 2 mobile carrier is looking at the popular iPhone as a new gateway to profit, after posting a better-than-expected 45% fall in first-half profit on Friday.

Unicom's announcement on Friday ended months of rumors about a tie-up with Apple, which has been trying to bring the iPhone to some of China's nearly 700 million mobile subscribers. Apple said the Unicom deal was not exclusive.

Unicom did not give a price for the iPhone, but Chairman and Chief Executive Chang Xiaobing told reporters that it would be competitive. The company said the launch is expected in the fourth quarter of 2009.

Unicom may have to offer substantial subsidies to reach a competitive price, as the deal comes just a day after rival China Telecom said it would increase its budget for handset subsidies to 37% of wireless revenues, from 30%.

“Many foreign operators have seen their EBITDA margins fall after launching iPhones,” said Marvin Lo of Daiwa Securities, based in Hong Kong. “So I am concerned China Unicom's margins could also come under pressure.”

Unicom and rivals China Mobile, the world's largest mobile carrier, and China Telecom, are all under a margin squeeze as they are in the middle of a three-year $58.5 billion spending spree through 2011 to build their 3G networks.

Unicom said its first-half monthly average revenue per user (ARPU), a key indicator of profitability, for its mobile services fell to 41.7 yuan, from 43.6 yuan a year ago.

Unicom said it bought the phones in a bulk purchase from Apple, and would not use Apple's traditional revenue sharing model, but did not offer any details. Shares of Apple were up less than 1% at $170.16 on the Nasdaq.

The phones would not offer a Wi-Fi function, and Unicom predicted it would eventually secure a third of China's 3G market share, but did not provide a timeframe.

“If they don't offer any subsidies, the price should be around 3,000 yuan ($439.1) per phone,” said Liu Bin of Macquarie Capital Securities.

“I estimate in the first year they can get between 1.5 million and two million subscribers,” said Liu.

Many Chinese fans of the iPhone, however, are already using unlicensed iPhones in conjunction with existing GSM networks.

“The financial impact of selling the iPhone is limited for China Unicom,” said Yuanta Securities in a report dated Aug 21, citing the small target market for expensive smart phones in China, the absence of a Wi-Fi function, and handset subsidies.

Unicom will sell both the 2G and 3G iPhone models.

Unicom made the announcement as it said its profit in the first half of the year fell 45% to 6.62 billion yuan ($969 million) from 12.09 billion yuan. Seven analysts polled by Reuters had forecast a profit of 6.2 billion yuan.

The company is also struggling to integrate fixed-line operator China Netcom, which it absorbed last year as part of an industry-wide restructuring designed to increase competition by creating three major carriers.

Unicom is in the middle of a two-year $14.6 billion spending plan to build its wireless network, while spending is backloaded for this year as the 3G rollout is scheduled for the second half.

China Unicom shares rose 23.9% in the second quarter, beating the 20.9% gain by China Telecom and 15.0% rise in China Mobile.

However, all three lagged the 35.8 jump by Hong Kong's China enterprises index .HSCE over the same period. (Reuters)