China Mobile Is Counting on Android

China Mobile (CHL), the world's largest cellular operator, has an answer for Chinese consumers impatient to get their hands on Apple's (AAPL) iPhone. The market has plenty of pirated and smuggled iPhones but Apple hasn't concluded a deal with a Chinese carrier to carry legitimate versions of the hot handset. So China Mobile, which had negotiated unsuccessfully with Apple to launch the iPhone, has an offer for its users: Can't wait for the iPhone? Try the OPhone instead.

The operator and the big-name electronics companies it has lined up as partners hope consumers won't care much about the one-vowel difference. China Mobile is planning to roll out a series of smartphones that operate on Android, the operating system promoted by Google (GOOG). Android is an open-source OS, leading China Mobile to dub its phones using the software OPhones. Another important difference between China Mobile's offering and Apple's: Lots of companies will be making the OPhone. Among the big-name players working on producing OPhones for China Mobile are Dell (DELL), Philips (PHG), LG, and Samsung.

China Mobile could use a boost. With 493 million subscribers, the company has more than 70% of the Chinese cellular market, well ahead of rivals China Unicom (CHU) and China Telecom (CHA), but it is facing growing competition now that the Chinese government, after many delays, has finally opened the country to 3G networks. The stock price is up just 6.5% this year, compared to a 17% rise for Unicom, a 32% increase for Telecom, and a 41% jump for the benchmark Hang Seng index. On Aug. 20, China Mobile reported that second-quarter earnings fell 1.6% to $4.4 billion on an 8.9% rise in sales to $31.2 billion.

That's the first drop in profit in a decade—and makes it all the more important for China Mobile to come out with a popular line of 3G phones. Probably the first to come out with an OPhone handset will be Lenovo Mobile, one of the top local producers of cell phones. The company is a former subsidiary of PC maker Lenovo that since last year has been a separate company, backed by Lenovo parent the Legend Group. A spokesperson for Lenovo Mobile says the company will launch an OPhone next month. Neither China Mobile nor Apple responded to rerquests for comment.

Running on a Local 3G Standard Lenovo Mobile is already gearing up for the debut. For instance, surfers online can get a peak at Lenovo Mobile's marketing campaign (including young models in bikinis and one-pieces lounging poolside with their OPhones).The phone will operate on TD-SCDMA, a locally developed 3G standard that the Chinese government has authorized China Mobile to use. China Unicom and China Telecom are using standards that are more accepted internationally, UMTS and CDMA 2000.

Although TD-SCDMA is a riskier technology that has limited presence outside China, China Mobile's status as the market leader makes it an attractive partner for many foreign vendors eager to get Chinese telecom users hooked on their smartphones rather than the iPhone. Samsung Electronics already has two smartphones for China Mobile that run on Microsoft's (MSFT) Windows Mobile operating system—one introduced last year and one earlier this month—and plans to launch another Windows Mobile device as well as an Android phone later this year. LG Electronics introduced a Windows Mobile smartphone in July and will have an Android-powered OPhone by yearend as well.

Dell is trying its luck with China Mobile, too. On Aug. 17, when China Mobile announced it was starting an open platform for software developers in order to encourage them to create applications for its OPhones, the operator and Dell unveiled a Dell-made phone. "We really want to support the operator," says Theresa Shen, Greater China spokesperson for Dell, "and create a more personalized Internet experience for consumers."

Shen says the handset introduced, a first for Dell, is just a "proof of concept" device that shouldn't be confused with a final product. That may be because the prototype, called the mini3i, has had a rough time with critics. On BusinessWeek's TechBeat blog, Peter Burrows wrote that the device doesn't support Wi-Fi or 3G networks. "Words like 'proof of concept' and 'prototype' usually imply cool and cutting-edge," he wrote. "Unless Dell has found a way to pump applications and other services from China Mobile's just announced Mobile Store over those pokey 2G networks, it's hard to see why such a phone would stand out."

Another China Mobile phone has fared better. The Philips V900 handset, also introduced this week, won a positive review on Phandroid, a site devoted to Android news. Blogger Rob Jackson praised the handset's "iPhoney user interface," saying it "gives the OPhone name some nice legs." Noting that the Philips phone has Wi-Fi, a 3.5mm headphone jack, a 3.2-megapixel camera, and "pretty decent looks," Jackson concluded "the Philips V900 ain't a bad piece of hardware from the jump."

Will Apple Finally Strike a Deal? With its many OPhone models, China Mobile is trying to steal some of the thunder of its smaller rival, China Unicom. Apple has been in negotiations with Unicom for months regarding the iPhone, following failed negotiations last year with China Mobile. Because of Apple's inability to reach a deal with one of the operators, the only iPhones available in China are brought into the country illegally, with hacked software allowing them to operate on local networks. There are also plenty of counterfeit versions available. "There are tons of smuggled iPhones and tons of fake products out there," says Ted Dean, president and managing director of Beijing-based market research firm BDA China. "There clearly is demand and Apple wants to be in the market."

And, for all its resemblance to Apple's handset, the OPhone isn't the the real thing. Analysts think China Mobile's aggressive OPhone strategy might provide the impetus for Apple at last to conclude negotiations with China Unicom and launch the iPhone officially next month. Unicom spokesman Yi Difei, however, isn't willing to confirm a launch in September or even by the end of the year. "We will let everyone know when conditions permit," he says.

Unicom might also be hedging its bets, just in case the Apple talks don't pan out. Spokesman Yi won't comment directly on speculation the company plans to offer Android phones of its own (to be called the UPhone). However, he says, "it is always good to have various kinds of terminals."

For all the iPhone's popularity on the black market, continued delays over an Apple-Unicom deal might jeopardize the companies' chances in winning the battle against China Mobile and the OPhone. While China Mobile focuses on encouraging developers to come up with localized applications for Android handsets, China Unicom and Apple are still trying to hammer out an iPhone deal. "They haven't had enough time to do R&D and localize," says Charice Wang, an analyst with consulting firm Ovum. "They're still negotiating." And as they do, more OPhones are on the way.

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