China's iPhone Fans Find a Way

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Ranie Lei, a China Mobile spokesperson in Hong Kong, says that her company's chairman, Wang Jiangzhou, stated last month that the company was interested in talking with Apple. But Lei adds that she cannot confirm reports that talks have since stalled, reportedly over disagreements about profit-sharing. She called speculation "unfounded."

In the U.S. and other markets, Apple has cellular operators lining up to partner with the Silicon Valley innovator, putting Jobs in a strong negotiating position. In China, though, Apple doesn't have many choices. The government allows only two cellular operators, both of them state-owned. China Mobile is the bigger of the two and with a 70% market share and 369 million subscribers has a thumping lead over longtime laggard China Unicom . By yearend, China Mobile will have increased its subscriber base by 22.5% compared to 2006, according to a November research report from Sydney investment bank Macquarie, and its profits of $11.4 billion will have jumped 28%.

China Unicom Not Too Appealing as Partner

Indeed, in China Mobile, Apple may have met its match. The Chinese company's Hong Kong-listed shares have risen 111% this year, about the same as Apple's. But China Mobile has a market capitalization of $384 billion, compared to just $156 billion for Apple. If the Chinese operator is playing hard to get in talks over the iPhone, "it just highlights the dominance of China Mobile," says Dave Carini, an analyst in Beijing with research firm Maverick China. "They don't need to make deals like this. There is no need for it to make the kind of deal that American and European operators have been making."

No. 2 operator China Unicom probably isn't much of an option for Apple, though. The company has struggled for years, saddled by Beijing with the burden of operating both GSM and CDMA networks. Many people who follow the telecom industry closely believe that there's also a good chance that China Unicom will end up getting folded or merged into one of the country's state-owned, fixed-line operators when China's regulators finally issue the long delayed licenses for 3G service, possibly next year. "I'm not sure that Apple would want to lock itself into a deal with what is clearly the weaker operator in the market," says Carini. "Apple is very conscious of its image."

China Mobile does face some challenges, though. Its average revenue per user is declining, falling 1.5% this year, according to Macquarie, as the company finds budget-minded subscribers in poor rural and inland areas. An alliance with Apple would help the company draw more money from affluent customers in the big cities. In the meantime, dealers like Liu Yong can take advantage of the opportunity to meet the growing demand for iPhones.

Einhorn is Asia regional editor in BusinessWeek's Hong Kong bureau . Tschang is a correspondent in BusinessWeek's Beijing bureau.