More battles ahead for iPhone in China

The iPhone still faces tough negotiations and competition from look-alike handsets in China

Apple has emerged from winding negotiations with an iPhone deal in China, but the handset will still face government pitfalls and look-alike competitors in the country.

Local carrier China Unicom said Friday it had reached a three-year iPhone distribution deal with Apple, ending months of rumor about an impending agreement. The carrier will offer the iPhone 3G and iPhone 3GS, with the first handsets going on sale in the fourth quarter.

The deal launches Apple into a huge market where its products already have a following among fashion-conscious urbanites. China has nearly 700 million mobile subscribers, and 141 million of them used China Unicom's service at the end of July.

Marvin Lo, an analyst at Daiwa Securities, expects about 2 million iPhones sales in China each year through the China Unicom tie-up, not far above the number sold in other countries, he said. Apple currently sells about 30 million iPhones per year worldwide, he said.

China is a big market, but the iPhone faces competition in the country from copycat handsets and from iPhones imported on the gray market, Lo said.

Another mark against the Chinese iPhone is that it will not have Wi-Fi, a function China banned on mobile phones until this year and now allows only on handsets that support a domestic security specification for wireless LANs (local area networks).

Knock-off iPhones, sometimes hard to distinguish from real versions and other times engraved with brand labels like "Aiphone" or "Iphne," are widely sold in electronics markets in China for around $US100. They often share a display case with more expensive unlocked iPhones that have been smuggled into China.

Smuggled iPhones and others bought by Chinese travelers abroad are already popular in the county. There are currently about 1 million iPhones in China, consultancy Ovum estimates.

The iPhone will also have to compete against "Ophones," handsets from local carrier China Mobile with a similar interface. China Mobile on Monday showed off Ophones from companies including Dell, Lenovo Mobile and Dopod, which sells phones from High Tech Computer (HTC) in China. A sign by the Dell device said it was a prototype, but the Dopod phone, a version of the HTC Magic, is already on sale in China and other Ophones will go on sale soon.

China Mobile's newly launched mobile application store, for platforms including the Ophone, will help its handsets compete against the iPhone and its App Store, said Lo. IPhones will sell better than Ophones at first, but localized applications for Ophones could boost them in the future, he said.

But local media has reporting the App Store may not be pre-installed at all on iPhones from China Unicom, which like its rival carriers is state-owned.

China Unicom may be concerned that the App Store could draw users away from the carrier's own value-added services, said Liu Ning, an analyst at telecom research company BDA in Beijing.

Billing could be another obstacle for the App Store in China, said Liu. Apple would need a government license to accept download payments through China Unicom, though it could still accept online payments for downloads through its U.S.-based system, he said.

"There are still a lot of people who are waiting for the legal iPhone," Liu said. An official iPhone would have fewer technical problems than the cracked versions now sold in China, he said.

China Unicom reportedly will buy its iPhones directly from Apple and forgo any revenue sharing on them. Lo of Daiwa expects the price of iPhones in China to be around 1,250 to 1,500 yuan ($US183 to $US220) after subsidies from China Unicom.

Apple confirmed the China Unicom deal but declined to comment further. A China Unicom spokeswoman declined to give details on the deal.

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