Costs May Outweigh iPhone Sales for China Unicom

Posted 11 6 2009 11:38AM

China Unicom's agreement to offer the Apple iPhone 3GS may take a bite out of the Beijing company's bottom line. The wireless carrier's costs for marketing and subsidies may outweigh sales of iPhones and subscriptions.

Since solidifying its three-year, non-exclusive deal with Apple to sell the iPhone 3GS, China's number-two wireless carrier said Tuesday that it has secured one million new 3G network subscribers since the launch and foresees adding an additional one million subscribers each month. The company claims to have 5,000 subscribers already signed up for the iPhone 3GS in just four days since its launch.

Analysts, however, said the cost associated with rolling out the 3G (WCDMA) network, advertising and marketing the iPhone may take a toll on China Unicom's bottom line.

China Unicom, number two behind China Telecom, began focusing on its 3G network construction in January when it received its 3G operating license. The company has been able to reduce some costs due to bulk purchases, but expanded coverage from the original 284 cities planned earlier in the year to 335 has increased the rollout cost.

Unicom Not Alone

The company, however, isn't alone. China Unicom and its top rivals China Telecom and China Mobile have all had to deal with costs associated with the new 3G network, and all reported lackluster quarterly earnings last month.

The financial woes will not change for some time because of marketing expenses and network construction costs, Tong Jilu, vice president and chief financial officer at Unicom, told Reuters.

After reaching its multi-year agreement with Apple to sell the iPhone, China Unicom said it will implement several measures to steadily grow its mobile business while cushioning the decline of its landline business.

Scaling Down Expectations

With 5,000 iPhone subscribers signed up, China Unicom is confident that the launch of the iPhone 3GS, which will retail for $1,025, will boost its mobile sales in the fourth quarter. While 5,000 may be a lot for China Unicom, it pales in comparison to AT&T's launch in the U.S., which resulted in 146,000 iPhones sold.

While some analysts predict sales of the iPhone in China to be about 500,000, others say it won't matter because the cost of marketing the device as well as subsidies paid will shrink any profits from smartphone sales.

Already analysts are saying the launch of Apple's iPhone in China is a disappointment. Piper Jaffray's Gene Munster, an analyst known for cheering on Apple, initially said he expected China to contribute one million to two million iPhone sales to the worldwide total for next year. Unicom's launch, however, has Munster revising China's contribution of unit sales to 555,000 next year.

"We believe that eventually China will emerge as a major market for iPhone sales," wrote Jaffray in a research note on Tuesday, "but it could take a year or two to gain meaningful unit traction as it did in the U.S."