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China Unicom Offers Free IPhone 4S for $45 Monthly Contract

China United Network Communications Group (CHTZ), the nation’s second-largest wireless carrier, will give users an Apple Inc. (AAPL) iPhone 4S if they sign multiyear service contracts costing as little as 286 yuan ($45) a month.

The promotion starting Jan. 13 offers a 32-gigabyte model with a three-year plan, while a commitment to two years for a monthly fee of 386 yuan allows users to get the 16-gigabyte model, the company known as China Unicom said in a statement on its website yesterday.

China Unicom, the only one of the nation’s three carriers offering the iPhone with a service contract, is using the handset to woo high-end subscribers who play games and watch online videos using their phones. The user growth comes at a price as Unicom’s 3G subsidy costs in the first half of 2011 ballooned almost fourfold, driven by support for the iPhone.

“After subsidizing the iPhone, the operator will have less money for subsidizing other smartphone users that could be more profitable,” Steven Liu, a Hong Kong-based analyst with Standard Chartered Bank, said in an e-mail today. He rates (762) the shares “underperform” and said the company’s subscriber growth will “slow down despite iPhone.”

China Unicom (762) (Hong Kong) Ltd., the company’s publicly traded (762) unit, fell 1.3 percent to HK$16.42 at the close in Hong Kong, its largest decline since Dec. 15. That compared with a 1.2 percent drop in the city’s benchmark Hang Seng Index.

Sophia Tso, a Hong Kong-based spokeswoman for China Unicom, said she couldn’t immediately comment on what the iPhone 4S pricing plan would mean for its subsidy costs.

Data Surge

China Unicom is increasingly relying on subscribers who access the Web on their phones as growth in voice traffic slows. In August, the Beijing-based company said 51 percent of sales growth (762) in the first half of last year came from non-voice services, while data traffic on its 3G network jumped almost sevenfold in the same period.

The iPhone 4S features a virtual personal assistant called Siri that uses voice-recognition software. That feature prompts owners to use almost twice as much data as the device’s predecessors, network firm Arieso Ltd. estimates. While Siri currently functions only in English, French and German, Apple has pledged to make a Chinese-language version available this year, according to a statement on its website.

Users of high-speed third-generation networks in China more than doubled in the first 11 months of last year to 117 million, according to monthly figures from the mobile operators.

Subsidy Cost

China Unicom had 36.5 million 3G users at the end of November, or about 31 percent of the nation’s total. It trails China Mobile Communications Corp. (CHMOBZ), which had 48 million 3G users.

China Unicom’s 3G subsidy costs and related marketing expenses in the first half of 2011 jumped to 5.94 billion yuan, from 1.62 million yuan in the same period in 2010, the company said in August. Those costs ate up 45 percent of revenue at the operator’s money-losing 3G service in the first six months of last year, company data show.

Chairman Chang Xiaobing pledged in August to make the 3G unit profitable in the second half of 2011 by reining in subsidy costs and expanding sales of smartphones costing 1,000 yuan or less, such as ZTE Corp.’s V880 handset.

The mobile operator had a target of adding 25 million 3G users in 2011, of which it had gained 22.5 million through the end of November. The company, which reported the figure last month, doesn’t provide a breakdown of users by device.

Subsidizing the iPhone at as little as 286 yuan a month “would hit their near-term subsidy expense,” said Alen Lin, who rates Unicom shares “hold” at BNP Paribas Securities Asia in Hong Kong. The company had originally subsidized the iPhone 4 at that level and stopped because of the expense, he said.

“The 286-yuan plan was previously available with a two- year contract, but was later removed because Unicom lost money,” Lin said in an e-mail today. “So, now it’s back with a three-year contract. The justification would be they will have one additional year to recover the expense.”

To contact Bloomberg News staff for this story: Edmond Lococo in Beijing at elococo@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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