April 03,2009

Wooing iPhone: the Saga of China Mobile and Unicom

By CSC staff, Shanghai
With the news that China Unicom will soon introduce Apple's iPhone in China, it seems iPhone is only one step away from users here. However, with smuggled iPhones popular in China while iPhone is getting a cold shoulder in Japan, what conditions China Unicom will accept from Apple may stir up a sensation. China Mobile and Hong Kong CSL have not been willing so far to accept what they term iPhone's arbitrary conditions. Operators have developed a love-hate relationship towards iPhone and Apple.
In June 2008, Apple CEO Steve Jobs wrote the Chinese character "guo" (fruit) on the newly-released 3G version of iPhone. He declared at that time a "grand" plan: "Later this year, in China and Russia you will see it (iPhone)." But getting on towards a year later, there is still no legitimate iPhone presence in China.
Wang Jianzhou, CEO of China Mobile, was at the beginning enthusiastic. "The iPhone will have a great impact on the traditional telecom industry" he noted. But there is no denying that this is a big game between operators and terminal manufacturers. Who do the users belong to? And who will play a dominant role in the center of the industrial chain?
China Mobile: dissatisfied with iPhone models
One is the mobile operator with the largest number of users in the world, while the other is the producer of a globally popular product. If the negotiations between China Mobile and Apple iPhone could succeed, happiness would reign.
"Our customers like fashionable products, but in my opinion, the model has problems," said Wang Jianzhou in November, 2007, while taking part in the GSMA Mobile Asia Congress in Macao, where he first disclosed Mobile was discussing with Apple specific ways of introducing iPhone into China.
The model Mr. Wang referred to was not the unit itself but the cooperation pattern of profits between iPhone and operators. In cooperation with European and American operators, Apple takes 20%-30% of operators'profits.
China Mobile appointed its Manager of Data Gao Nianshu to contact Apple in the US. Gao said: "China Mobile can not accept the practice of Apple controlling the value chain." In addition, that iPhone can not send and receive MMS and is relatively weak was also a bone of contention.
At almost the same time, Steve Jobs noted in the CNBC interview that China Mobile had sent only one senior executive to Apple's headquarters in Cupertino, California. "The whole thing was too hasty, and the so-called negotiations went up and down, one round after another." For China Mobile, on the other hand, Apple has not been sincere. "IPhone is now focusing on the Japanese and other markets. We halt here and prepare for the next round of negotiation," Gao Nianshu said.
Wang Jianzhou has consistently insisted that talks between China Mobile and Apple on the introduction of iPhone have not officially started at all.
In June, 2008, Apple introduced a 3G version of iPhone. And in Europe it came under the revenue-sharing business model with subsidies in cooperation with the operators. This gave hope to China Mobile. Wang Jianzhou said excitedly: "The biggest obstacle between China Mobile and Apple has disappeared, and remaining problems are limited to working level now that Apple will not demand profit-sharing."
During this period, China Mobile again sent a management team, again including mostly members of the Data Department, to the US for negotiations with Apple, and Wang himself held many video and telephone conference with Jobs. However, even with terminal subsidies and profit sharing of value-added services, the two sides failed to reach agreement.
China Mobile's attitude towards Apple gradually toughened. At the Davos meeting in September, Wang said, "iPhone is not the only choice for China Mobile."
Wang maintained that stance through the company's performance conference this year. "China Mobile is continuing negotiations with Apple," he said. "The gate is open, but the cooperation must be based on mutual benefit."
The implication was clear. China Mobile had given up the initiative for negotiating with Apple. If Apple wished to deal with Mobile, it had to come up with concessions.
China Unicom: co-operation model uncertain
China Unicom dates its first contact with Apple at the end of 2007, when it was said that the negotiation between Mobile and iPhone were failing. Focus immediately shifted to Unicom.
Actually, talks between Unicom and Apple started at almost the same time as those between Mobile and Apple. Li Gang, vice-president of China Unicom, particularly sensitive to factors influencing competition, got interested in the matter. Li is in charge of the market for China Unicom and has served as general manager at both Guangdong Mobile and Beijing Unicom. He once was responsible for turning over a million yuan per day for Guangdong Mobile. Unicom began to study various possible strategems to come into contact with Apple.
As the number two player in the Chinese mobile communications market, China Unicom's attitude is a bit more modest, which is reflected in its dealings with Apple.
A year ago in January, Yu Yingtao, general manager of Vsens, a Unicom subsidiary, noted at a forum that even though operators do not want to be separated from terminals, they have to accept the fact of the transition of mobile phone companies converting to Internet companies.
At present, Yu is one of the core members in the Unicom-Apple negotiation team, and his earlier speech may represent to some extent the current position of Unicom.
China Unicom's low-profile Chairman Chang Xiaobing spoke vaguely about the business opportunities iPhone might bring Unicom in the future, and said that iPhone will receive promotion and application in the Chinese market.
Insiders disclose that low profile negotiations between the two parties have been under way for a long time. Changes in the pattern of domestic telecommunications as well as the issuance of 3G licenses have recently pushed Unicom forward.
On May 24, 2008, China's telecommunications industry underwent a great restructuring. Although 3G licenses had not yet been issued, China Unicom was to obtain the prevailing license for WCDMA, while China Mobile would get a TD-SCDMA license.
This has been part of the problem between China Mobile and Apple. Mobile demanded a 2G and TD version of iPhone. This was unacceptable to Apple, as redeveloping a TD version of iPhone represents a huge new outlay. China Unicom proposed a WCDMA version at the beginning, needing only a slight adaptation at low cost, so their model was more acceptable to Apple.
On January 7, 3G licenses were issued, and China Unicom accelerated the pace of its negotiations with Apple. A team of three senior managers undertook a 10-day discussion with Apple a month ago. They are reluctant to comment on the details and the reserved Chang Xiaobing emphasized that the two sides have not signed the final protocol, so the outcome did not preclude the possibility of failure. However, Unicom insiders say "co-operation is basically determined, but a step away from a formal result".
So, the specific mode of cooperation is still unknown. Since iPhone in China needs to go through many rounds of preparation, for network detection and compatibility as well as cell phone procurement, it is unlikely it will formally hit the market on its planned May 17 opening.
But one certainty is that iPhone is ever nearing Chinese consumers. Daniel Amir, Lazard Capital Markets analyst, reported that Apple will announce it has developed a high-end version of the iPhone targeting North American and European markets as well as a low-end version for emerging markets such China and India at the Worldwide Developers Conference in June 2009.
Many Chinese analysts firmly believe that China Mobile is not sitting placidly and will counterattack. Unicom's introduction of iPhone may yet find some serious bumps in the road.



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