China Unicom Ltd. (NYSE: CHU) just completed a hugely successful launch of the iPhone 4 from Apple Inc. (NASDAQ: AAPL). The company reportedly took pre-orders for 200,000 of the phones and sold out, or nearly so, 60,000 units on the first weekend of sales. The 32GB model sells for $905 without a contract and the 16GB model sells for $754.
China Unicom, together with competitors China Mobile Ltd. (NYSE: CHL) and China Telecom Corp. Ltd. (NYSE: CHA), have about 800 million subscribers and all are struggling with the high cost of building out 3G networks. It doesn’t help that all three networks use different, incompatible technologies. China Mobile has a deal with Research in Motion Ltd. (NASDAQ: RIMM) to develop a Blackberry phone for China Mobile’s 3G network, and China Telecom has a similar deal with RIM and one for the Palm Pre, now sold by Hewlett-Packard Co. (NYSE: HPQ).
Perhaps the success of the iPhone will jump start smartphone adoption in China, where there are only about 16 million subscribers so far. Smartphones, and their accompanying data services contracts, offer carriers much higher revenue opportunities than feature phones.
But China Unicom can’t wait for that day to come. The company has announced that it sold $1.84 billion in five-year convertible bonds at an initial conversion price of about $2.04/share. The company is burning cash to build out its 3G network, reported a net decrease in cash of $149.3 million in the first half of 2010 according to The Wall Street Journal. And the company still faces serious marketing expenses to attract customers to its 3G offerings.
Of course, the iPhone 4’s success helps with that. The company probably doesn’t make much on the handset itself, but is banking on the fact that consumers will want the data services the company provides on its 3G network.
Not only does the company have an exclusive deal (so far) on the most popular smartphone around, but neither China Mobile nor China Telecom is yet ready to go with a competitive offer. The trick for China Unicom is to sell as many iPhones and data services contracts as it can while its competitors are invisible. The company just has to hope that it can make its cash stretch to do all that needs to be done to take advantage of its current lead.
As of this writing, Paul Ausick did not own a position in any of the stocks named here.
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