China Unicom Rebuked on Handling of IPhone Rules

China United Network Communications Group Co., trailing in the market for smartphone users, was rebuked by the government for threatening to freeze customer deposits if they use Apple Inc.’s iPhone on a rival network.

Unicom, the only mobile operator authorized to offer the iPhone in China, caused “widespread concern” with its contract rules, the Ministry of Industry and Information Technology said in a report by the official Xinhua News Agency that was posted on the regulator’s website today.

China’s second-biggest phone company issued the rules Nov. 22 in an attempt to prevent customers from using iPhones sold by Unicom on the network of China Mobile Communications Corp. The iPhone4 is in short supply in China because some buyers have purchased the handset for resale, according to Unicom, contravening the service agreement and undermining the company’s ability to profit from its exclusive arrangement with Apple.

“There’s a lot of publicity regarding this phone so the ministry is saying ‘you’ve got to be careful with this,’” Paul Wuh, a Hong Kong-based analyst at Samsung Securities Co., said in an interview today. “They are subsidizing these phones and they want to make sure they get the most benefit from it.”

China Unicom (Hong Kong) Ltd., the group’s Hong Kong-listed unit, fell 0.6 percent to HK$10.62 at the 4 p.m. close of trading in the city. The stock has gained 3.3 percent this year, lagging behind China Mobile Ltd.’s 7 percent advance.

‘Respect Rights’

The company should “respect and protect the legitimate rights and interests of telecommunications users, improve the service agreement, and improve service quality,” Xinhua quoted an unidentified ministry official as saying.

Wen Baoqiu, a spokesman for Unicom Group, today confirmed the accuracy of the government’s statement as reported by Xinhua, and posted on the ministry’s website.

“The ministry requires every enterprise to respect and protect consumer rights,” Wen said in a phone interview. “Our new rules haven’t harmed consumer interests. It was in order to protect consumer rights that we issued these rules. It doesn’t mean the ministry is unhappy with the rules. They are not happy or unhappy.”

Ministry spokesman Wang Lijian wasn’t immediately available to comment.

Unicom began implementing its new rules from Dec. 1 and implementation is off to a “smooth start” the company said in a statement on its website today. Users were not affected, and the majority “generally understand and accept the new China Unicom iPhone contract policy,” today’s statement said.

Lags Rival

Even with the exclusive arrangement for Apple’s iPhone, Unicom has been unable to match larger rival China Mobile in the addition of users to the high-speed, third-generation networks that allow smartphones to surf the Internet and download music. China Mobile in October added 1.7 million 3G subscribers, compared with Unicom’s 1.1 million, according to data the companies released last month.

China Mobile had a total of 575 million mobile phone subscribers at the end of October, including 17 million 3G users. China Unicom had 163.8 million mobile subscribers, including 11.7 million 3G customers.

To contact the reporter on this story: Edmond Lococo in Beijing at elococo@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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