China Unicom: Why iPhone Users are Mad

For iPhone users in the U.S., the gripes of their Chinese counterparts may sound all too familiar. Dropped calls. Spotty coverage. Lousy customer service. In the U.S., the telecom network that Apple (AAPL) fans love to hate is AT&T (T). In the People's Republic, it's China Unicom (CHU). The state-owned company is the only Chinese mobile carrier with the type of 3G network that works with the iPhone. Problem is, Unicom is a longtime also-ran, far behind market leader China Mobile (CHL) and notorious for running a network that drives customers up a wall. "Everyone hates them," says Paul Wuh, an analyst in Hong Kong with Samsung Securities.

Unicom's reputation is so bad that many Chinese iPhone owners are willing to alter their handsets—and lose access to many iPhone apps—rather than sign up with the company. Unicom's challenge "is convincing users they won't have to lean out a window to make a call," says analyst Mark Natkin of Marbridge Consulting, a Beijing-based market research firm.

Here's how the Unicom end run works: Users buy iPhones from Apple stores in Beijing or Shanghai or at nationwide retailer Suning and get a China Mobile service contract if they don't have one. Then they take their China Mobile SIM card (the chip that identifies a phone to a cell network) and snip it down to the smaller shape that iPhones use. Those iPhone users then have to settle for China Mobile's slower 2.5G network. (China Mobile has a 3G network that can't run the Apple gadget.)

Vincent Luo, a 30-year-old office worker in Shanghai, bought an iPhone 3G while traveling in Singapore in January, and signed up with China Mobile when he got home. The slower data speeds mean data-intensive apps don't run very well—online video is choppy, for example. "But the signal is much stronger," he says. "I don't want to switch to Unicom." A Unicom spokesperson declined to comment.

Unicom wasn't Apple's first choice as a network provider in China. Apple Chief Executive Officer Steve Jobs signed off on teaming up with the company only after on-again, off-again talks with China Mobile went nowhere. In 2009, Apple signed a three-year agreement with Unicom, making it the only Chinese carrier authorized to sell iPhones. Unlike Apple's deal with AT&T in the U.S. or carriers such as Softbank in Japan, the alliance doesn't prevent Apple hardware from working with other carriers. With the Sept. 17 launch of the iPad in China, Apple moved to distance itself from its erstwhile partner, offering the tablet computer with Wi-Fi (which doesn't require a carrier to work) rather than a 3G option that would tie users to Unicom.

Unicom is spending big to improve its image. The company on Sept. 28 sold $1.84 billion in convertible bonds, with the proceeds going to build out the carrier's network. Over the past three years, says Samsung's Wuh, Unicom has spent more than $22 billion to boost its network and plans on spending $7.5 billion more. The company is addressing the problem now, "but network coverage takes a fairly long period of time to perfect," says Wendy Liu, an analyst in Hong Kong with RBS (RBS). "They've never had enough money to grow as they wish."

The company is starting to win over some skeptics. On Sept. 25, Unicom began selling the iPhone 4 and reported strong demand, with orders for 200,000 handsets in a few days. The company looks forward to "sustainable, rapid, and healthy growth," Chairman Xiaobing Chang said in a Sept. 28 press release. If it can ever get its network reliability up to snuff, the operator Chinese love to hate might finally start winning some friends.

The bottom line: China Unicom needs to upgrade the reliability of its network to repair its poor quality image and win the loyalty of mainland iPhone users.

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