A packaging box for Apple Inc's iPhone is on display along with other foreign brands in a shop in Changsha, capital of Hunan province in South China, earlier this year. Bloomberg News

HONG KONG: China Unicom (Hong Kong) Ltd \, the country's second-biggest provider of mobile-phone service, has sealed a 3-year deal with Apple Corp that will roll out Apple Inc's iPhone handsets on the mainland in the fourth quarter, Chairman Chang Xiaobing told reporters in Hong Kong on Friday.

The iPhone may help Unicom, which trails its bigger rival China Mobile in the wireless market, win higher-spending users and bolster demand for more profitable non-voice services including Web-browsing and games.

The company is looking at the popular iPhone as a new gateway to profit, after posting a better-than-expected 45 percent fall in first-half profit on Friday.

The company 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 (0728.HK) said it would increase its budget for handset subsidies to 37 percent of wireless revenues, from 30 percent.

"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 (0941.HK), 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 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.

"Unicom definitely needs the iPhone, or any type of competitive edge, as a game-changer," said Duncan Clark, chairman of BDA China, a Beijing-based technology researcher.

The company is the only mainland carrier with technology that is compatible with the iPhone, prompting Apple to reach a deal, according to Clark.

Unicom said it will invest a combined 100 billion yuan in its mobile-phone business in the two years through 2010, with most of the spending focused on third-generation networks.

The company had 141.1 million wireless-phone users at the end of July, fewer than a third the total at China Mobile, which is also the world's biggest phone company by subscribers.

As for China Unicom's 45% profit decline, net income for the six months ended June 30 declined to 6.62 billion yuan from 12.09 billion yuan a year earlier, the Beijing-based company said.

Unicom also planned to increase investment on networks by 56 percent this year to accelerate the start of third-generation services, which allows faster Web-browsing and music downloads on mobile phones. Marketing spending may increase further in the second half as competition intensifies.

"The capital spending will have much greater impact on their profitability going forward," Bertram Lai, who rates Unicom shares "neutral" at CIMB Securities (HK) Ltd, said. The company held back promotions of its wireless services until the second half, pending a wider rollout of its 3G networks, he added.

Unicom gained 7 million mobile-phone users in the first half, compared with 8.4 million a year earlier. The company added a further 680,000 subscribers last month for a total of 141.1 million at the end of July, fewer than a third of China Mobile's 497.7 million.

In October, Unicom bought China Netcom, the dominant fixed-line carrier in northern China, after selling the smaller of its two mobile-phone units to China Telecom, as part of a government-led industry restructuring to boost competition.

Unicom closed unchanged HK$10.68 in Hong Kong trading on Friday. The stock has gained 15 percent this year, compared with a 39 percent increase in China Telecom Corp, the biggest fixed-line carrier, and a 0.2 percent decline in China Mobile.

China Daily - Agencies

(HK Edition 08/29/2009 page2)