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China's second-largest carrier may end contract sales of Apple's iPhone

post #1 of 28
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China's Unicom is struggling to benefit from its investment in contract sales of Apple's latest iPhone models and is reportedly considering a move that would do away with traditional pricing discounts on the handset for customers willing to sign two-year service agreements.

As the only WCDMA carrier in China, China Unicom signed a two-year agreement with Apple back in September of 2010 to offer its iPhone subscribers the handsets at reduced pricing if they agree to 24-month service contracts.

But high overhead costs for the devices themselves, coupled with a need for continued investment in infrastructure to support surging growth and data consumption by iPhone users, has China Unicom mulling a move to end contract bundles of the phone come next month.

A report by China-based tech.sina.com states that China Unicom 'has not substantially profited from sales of iPhone 4' and therefore may not re-sign its agreement with Apple to continue sales of the iPhone 4S or a new version of the phone widely expected to make its debut in September.

Though no further details were reported, it appears that the carrier would continue to carry the iPhone but only market it to customers who are willing to pay full retail price for the device.

Although most iPhone carriers offer Apple's latest device to customers at prices between $199 and $399 USD, they actually purchase the phones from Apple at much higher costs, then turn around and subsidize the handsets for customers, banking on recouping the overhead costs and making profits through two-year, high-margin service agreements.



For its part, China Unicom has been amongst the most aggressive with its subsidies, and earlier this year began offering the 16GB iPhone 4S at no cost to customers who sign up for multi-year service contracts for as little as $45 USD per month.

With more than 125 million subscribers, China Unicom is China's second-largest cell phone service provider. It's also the tenth-largest worldwide. But its 3G business has reportedly been a money-losing operation, with high smartphone subsidies -- like those required for the iPhone -- accounting for 45% of its overhead.

As of January, the average selling price of an iPhone -- or the price charged by Apple to carriers -- was roughly $660.
post #2 of 28
Quote:
Originally Posted by AppleInsider View Post

China's Unicom is struggling to benefit from its investment in contract sales of Apple's latest iPhone models and is reportedly considering a move that would do away with traditional pricing discounts on the handset for customers willing to sign two-year service agreements.
As the only WCDMA carrier in China, China Unicom signed a two-year agreement with Apple back in September of 2010 to offer its iPhone subscribers the handsets at reduced pricing if they agree to 24-month service contracts.
But high overhead costs for the devices themselves, coupled with a need for continued investment in infrastructure to support surging growth and data consumption by iPhone users, has China Unicom mulling a move to end contract bundles of the phone come next month.

That makes a lot of sense. /s

"We're not selling enough of these phones even with a massive discount that makes them appear to be more affordable. Yet they're the best selling phone in the world and in high demand everywhere. I know, let's drop the subsidy and only sell them to people who are willing to pay the full amount up front."

Good luck with that.
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post #3 of 28
Quote:

 For its part, China Unicom has been amongst the most aggressive with its subsidies, and earlier this year began offering the 16GB iPhone 4S at no cost to customers who sign up for multi-year service contracts for as little as $45 USD per month.
 

 

Maybe if they didn't shoot themselves in the foot by subsidizing the iPhone so much, they wouldn't be making so little money. Either raise your plan rates or charge more upfront for the phone.

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post #4 of 28
Really, what the hell made them give the phone
Away for? I don't get it. Am I missing something?
post #5 of 28

Giving things away for free only gets you the cheapest customers, I think Confucius said that. 

post #6 of 28
Apple is doomed
post #7 of 28
Quote:
Originally Posted by jragosta View Post


. Yet they're the best selling phone in the world and in high demand everywhere. I know, let's drop the subsidy and only sell them to people who are willing to pay the full amount up front."
Good luck with that.

 

Actually it makes plenty of sense. If people want the device, they will pay for it. Economics 101. If the iPhone is as popular as we all claim it is, and as a premium device proposition as we all claim it is compared to the me-too devices, then it shouldn't matter. People will still buy it.

 

US carriers have been whispering similar things too, but I doubt it would ever happen. Maybe carriers are trying to get better pricing out of Apple.

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post #8 of 28

Someone help me out with this.. I get the US carriers subsidize the phones and thats the reason for the high cost of a two year contract. What I don't get is why don't the costs go down once the two years are up and the phone is paid for? Or why is it the same cost per month to bring your own off contract phone? Seems your paying the same if you have a subsidize phone or not, minus any contract or ETF fees since you can drop service at anytime.

 

 

post #9 of 28
Quote:
Originally Posted by thataveragejoe View Post

Actually it makes plenty of sense. If people want the device, they will pay for it. Economics 101. If the iPhone is as popular as we all claim it is, and as a premium device proposition as we all claim it is compared to the me-too devices, then it shouldn't matter. People will still buy it.

US carriers have been whispering similar things too, but I doubt it would ever happen. Maybe carriers are trying to get better pricing out of Apple.

It seems irrational for them to go from a policy of 100% subsidy to one of 0% subsidy for their most desired phone. Clearly a 100% subsidy is aimed at stealing customers from other carriers, and so must be recognized as a marketing cost. If that marketing campaign is unsustainable, they need to charge more for something. Completely giving up on marketing the iPhone via subsidies sounds like the kind of solution that only people who are shorting AAPL predict (here as well as in China).
post #10 of 28

Why would they reduce the cost to $0 if demand is high AND they have trouble supporting the network data requirements?   

 

The 4S is going to get a $100-$150 cost reduction (to the carriers) in the next 3 weeks.   That alone is enough to generate an ADDITIONAL 20-25% profit margin to the China Unicom.  That alone should be enough to solve this issue.  Plus, make it a $49 price point (vs. free),  and Unicom should be making a healthy profit 

 

I honestly don't understand their position.  There is a good chance they are simply trying to use this as leverage with Apple.  Which has about a zero chance of working

 

And if they decide to pull the subsidaries, go ahead and let them  

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post #11 of 28
Quote:
Originally Posted by NormM View Post


It seems irrational for them to go from a policy of 100% subsidy to one of 0% subsidy for their most desired phone. Clearly a 100% subsidy is aimed at stealing customers from other carriers, and so must be recognized as a marketing cost. If that marketing campaign is unsustainable, they need to charge more for something. Completely giving up on marketing the iPhone via subsidies sounds like the kind of solution that only people who are shorting AAPL predict (here as well as in China).

I see a cultural difference here.

 

Do they sell other phones by subsidy in China? I suspect that they don't. Why? If Chinese consumers prefer owning the device out right, subsidy sale might become a nuisance because the data plan would be viewed as a plot to cheat them by the carrier.

 

American consumers are used to being cheated by carriers, IMHO. After the 2 year contract, carriers continue charging you the same price for the data plan. It's a rip-off. But, if you try to sell the device out right (any cell phone), you probably get very bad result  :(

post #12 of 28
Quote:
Originally Posted by jj.yuan View Post

I see a cultural difference here.
Completely agree. American consumers (myself included) are idiots for agreeing to the terms we do, and I am ashamed at myself for being out of contract on my iPhone 4 but not wanting to get a new phone until the 5 comes out...

Interesting economics lesson though:
If you bought a subsidized iPhone 4 in July 2010 for $200, and invested $250 in one share of AAPL, and spent $180 taking your girlfriend out for a nice dinner, today you would have a phone worth $300 on Craigslist, $643 worth of AAPL stock, and maybe something memorable with the girlfriend. If you instead bought the phone at the unsubsidized $630 price on a credit card at 18% interest, made the $10 monthly minimum payment, you would be $300 in the hole after selling the phone.
post #13 of 28
Quote:
Originally Posted by Synergi View Post

Someone help me out with this.. I get the US carriers subsidize the phones and thats the reason for the high cost of a two year contract. What I don't get is why don't the costs go down once the two years are up and the phone is paid for? Or why is it the same cost per month to bring your own off contract phone? Seems your paying the same if you have a subsidize phone or not, minus any contract or ETF fees since you can drop service at anytime.

 

 

Exactly, $45/mo is way too much. I only spend approx €10/mo on calls and another €5/mo on 50MB (the unused portion of which is carried over, so I have approx 500MB data to use). If my data runs out, I top up with another €10 which gets me 500MB. So I spend €15-€20/mo. Granted, I don't make many calls, but since most of my correspondents have an iPhone, I do a lot of texting, which costs me nearly nothing. I could go to another provider and get 2GB/mo for €15, with calls at 23c/min (Most voice calls I receive, I don't call much).

 

$45/mo ! What are these people thinking?

post #14 of 28
Quote:
Originally Posted by jj.yuan View Post
American consumers are used to being cheated by carriers, IMHO. After the 2 year contract, carriers continue charging you the same price for the data plan. It's a rip-off. But, if you try to sell the device out right (any cell phone), you probably get very bad result  :(

Your right we are being cheated, perhaps fooled is a better word as "cheated" implies something illegal.  On the other hand I personally don't keep using a 2-year old phone, at the end of two years I am more than ready to use my discounted upgrade to move into the newest model.  The only time period that I use my off-contract phone is waiting a couple of months for the next iPhone to be released.  I am very aware of my upgrade cycle.  I would think there are many others that are same.

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post #15 of 28
Quote:
Originally Posted by Synergi View Post

Someone help me out with this.. I get the US carriers subsidize the phones and thats the reason for the high cost of a two year contract. What I don't get is why don't the costs go down once the two years are up and the phone is paid for? Or why is it the same cost per month to bring your own off contract phone? Seems your paying the same if you have a subsidize phone or not, minus any contract or ETF fees since you can drop service at anytime.



Because they are not legally bound to line item the price and cut that fee out.
We need a class action suit or such to put an end to it. Anyone know a lawyer?
post #16 of 28
Quote:
Originally Posted by diplication View Post

Your right we are being cheated, perhaps fooled is a better word as "cheated" implies something illegal.  On the other hand I personally don't keep using a 2-year old phone, at the end of two years I am more than ready to use my discounted upgrade to move into the newest model.  The only time period that I use my off-contract phone is waiting a couple of months for the next iPhone to be released.  I am very aware of my upgrade cycle.  I would think there are many others that are same.

I have to go to Canada,Australia etc several times a year due to work. So work buys me an 'office phone' out right so it's factory unlocked. But our rates are the same as someone on contract with a subsidy to repay
post #17 of 28
Quote:
Originally Posted by silverpraxis View Post

Maybe if they didn't shoot themselves in the foot by subsidizing the iPhone so much, they wouldn't be making so little money. Either raise your plan rates or charge more upfront for the phone.
Quote:
Originally Posted by Kimk69 View Post

Really, what the hell made them give the phone
Away for? I don't get it. Am I missing something?
Quote:
Originally Posted by Synergi View Post

Someone help me out with this.. I get the US carriers subsidize the phones and thats the reason for the high cost of a two year contract. What I don't get is why don't the costs go down once the two years are up and the phone is paid for? Or why is it the same cost per month to bring your own off contract phone? Seems your paying the same if you have a subsidize phone or not, minus any contract or ETF fees since you can drop service at anytime.


If it's anything like the US arrangement, they're not losing money. AT&T, for example, heavily subsidizes the phone up front (not 100%, more like 70%) Since they're paying $600 for the phone, they have to shell out a lot of cash at the beginning and then recover that cash over the two year contract (plus plenty of extra revenue to cover the cost of service and profit). When AT&T started with the iPhone, there were a lot of reports about how their cash position was seriously damaged, but since the costs are probably amortized, it does not translate into losses. Even if the count the losses all at once, it's still a paper loss and doesn't directly affect cash.

I suspect it's similar in China. They subsidize the phone up front and recover the money over time. They're probably making money over the life of the contract.
Quote:
Originally Posted by VanFruniken View Post

Exactly, $45/mo is way too much. I only spend approx €10/mo on calls and another €5/mo on 50MB (the unused portion of which is carried over, so I have approx 500MB data to use). If my data runs out, I top up with another €10 which gets me 500MB. So I spend €15-€20/mo. Granted, I don't make many calls, but since most of my correspondents have an iPhone, I do a lot of texting, which costs me nearly nothing. I could go to another provider and get 2GB/mo for €15, with calls at 23c/min (Most voice calls I receive, I don't call much).

$45/mo ! What are these people thinking?

Depends on where you live. In the U.S., $45 per month is actually a below-average charge. On AT&T, it's not hard at all to pay twice that, even for modest service. We do, however, have prepaid plans in the $45 range, but those don't include the recovery of subsidy costs, so they're not really comparable.

I have no idea what the costs are in China, so I can't say if $45 is reasonable, but I would certainly not reject it out of hand.
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post #18 of 28
Quote:
Originally Posted by charlituna View Post


I have to go to Canada,Australia etc several times a year due to work. So work buys me an 'office phone' out right so it's factory unlocked. But our rates are the same as someone on contract with a subsidy to repay

I understand what you are saying, but I can't see what point you are trying to make.  Point me in the right direction.  Also wouldn't it be more cost effective for the work phone to be bought on-contract and either pay the wireless roaming charges or slip in a new sim card (from the country you happen to be in)?

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post #19 of 28
Quote:
Originally Posted by Synergi View Post

Someone help me out with this.. I get the US carriers subsidize the phones and thats the reason for the high cost of a two year contract. What I don't get is why don't the costs go down once the two years are up and the phone is paid for? Or why is it the same cost per month to bring your own off contract phone? Seems your paying the same if you have a subsidize phone or not, minus any contract or ETF fees since you can drop service at anytime.



The contract pricing continues month to month, unless you contact your carrier & ask for better pricing. They should offer you their lowest rate plans since the phone is already paid off. That said, they will probably still require a data & texting plan since that's built into the iPhone. I've done this with other phones, but have been upgrading my iPhone when my contract fully expires. Even with a feature phone, contract rates continue month to month. I've never heard of a carrier automatically lowering rates. It's not in their revenue management to do that unless the customer requests it
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post #20 of 28
Quote:
Originally Posted by diplication View Post

I understand what you are saying, but I can't see what point you are trying to make.  Point me in the right direction.

It seems that his point is that the carriers are out to squeeze every penny out of you that they can and there's no fairness or rationality to their plans.

If they were fair, the monthly rates would drop after you had completed your contract period. Similarly, the monthly rate for a full-price non-subsidized phone should be lower than a subsidized phone. But they're not.
Quote:
Originally Posted by diplication View Post

Also wouldn't it be more cost effective for the work phone to be bought on-contract and either pay the wireless roaming charges or slip in a new sim card (from the country you happen to be in)?

You would think so. However, there may be more involved. For example, if the company has a lot of turnover, they might not want to get locked into a 2 year contract for a new employee. Better to simply pay by the month and if you lose the employee, you drop the plan. However, in that case, I'd strongly suggest looking at one of the non-contract, pay as you go plans which are less than the major carrier plans, anyway.
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post #21 of 28
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Originally Posted by jragosta View Post

You would think so. However, there may be more involved. For example, if the company has a lot of turnover, they might not want to get locked into a 2 year contract for a new employee. Better to simply pay by the month and if you lose the employee, you drop the plan. However, in that case, I'd strongly suggest looking at one of the non-contract, pay as you go plans which are less than the major carrier plans, anyway.

Probably was done in the manner it was, because the reason many things are done at companies - for the person in charge of taking care of this, it wasn't about saving money, it was done because it was easier.  Researching, comparing, and setup all take time -  saving money would have required effort.

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post #22 of 28
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Originally Posted by AppleInsider View Post

... a need for continued investment in infrastructure to support surging growth and data consumption by iPhone users ...

 

Cell carriers just hate spending money on their infrastructure, because building out their infrastructure for the future affects their bottom line today.

 

Just ask Verizon.  If rumors that Verizon is / was hyping Android phones are true, then Verizon must be trying to curb data use to ease the load on their infrastructure.  Android users consume far less data than iPhone users.  Do the math.

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post #23 of 28
Quote:
Originally Posted by Synergi View Post

Someone help me out with this.. I get the US carriers subsidize the phones and thats the reason for the high cost of a two year contract. What I don't get is why don't the costs go down once the two years are up and the phone is paid for? Or why is it the same cost per month to bring your own off contract phone? Seems your paying the same if you have a subsidize phone or not, minus any contract or ETF fees since you can drop service at anytime.

 

 

Because most US cell phone plans are a complete rip-off. The exception, of course, is T-Mobile's Value plans, where the plan is $20 less per month and you can then either just buy the phone at full retail price or finance it so that your plan costs the same as a subsidized plan until the phone is paid off, at which point it gets $20/mo cheaper. And it doesn't even usually take 2 full years — usually the plan price drops after 20 months or so. And when T-Mobile gets the iPhone next year, you'll be able to use this plan with an iPhone. Heck, you can take advantage of it right [i]now[/i] if you buy an unlocked iPhone, assuming you live in one of the areas where T-Mobile has refarmed their 1900 MHz spectrum to WCDMA.

 

Of course, the plan hasn't been as popular as it should be, due to customers who apparently failed 6th grade math and can't figure out that $200 up front + $20 extra for 20 months is a better deal than $200 up front and $20 extra forever, so this might be a "get it while it lasts!" sort of situation. :-\

post #24 of 28

First off they have less than 30% market share.  China Mobile has 70%.  Now, obviously, these cell phone carriers are STILL trying to figure out how much data smartphone users actually use, since they keep adding features, and people are still trying to figure how to use them, how much to charge, etc.

 

I think that either this company is using this as a means to re-negeotiate their contract or just not be in a position to actually figure out how to compete.


They spent a LOT of money upgrading their system and they are competing against China Mobile which is HUGE.

 

We'll see what happens.

post #25 of 28
Quote:
Originally Posted by Synergi View Post

Someone help me out with this.. I get the US carriers subsidize the phones and thats the reason for the high cost of a two year contract. What I don't get is why don't the costs go down once the two years are up and the phone is paid for? Or why is it the same cost per month to bring your own off contract phone? Seems your paying the same if you have a subsidize phone or not, minus any contract or ETF fees since you can drop service at anytime.

 

 

Simply because that is what you signed up for. your choices at this point would be to just carry on, move to another carrier, or re-up on another contract and get the newest phone. Either way the carrier is there to milk you. To think otherwise is wishful.

 

Quote:
Originally Posted by jj.yuan View Post

I see a cultural difference here.

 

Do they sell other phones by subsidy in China? I suspect that they don't. Why? If Chinese consumers prefer owning the device out right, subsidy sale might become a nuisance because the data plan would be viewed as a plot to cheat them by the carrier.

 

American consumers are used to being cheated by carriers, IMHO. After the 2 year contract, carriers continue charging you the same price for the data plan. It's a rip-off. But, if you try to sell the device out right (any cell phone), you probably get very bad result  :(

I am sure they do. Especially smart phones. And its called maximising profits.

 

Quote:
Originally Posted by aaarrrgggh View Post


Completely agree. American consumers (myself included) are idiots for agreeing to the terms we do, and I am ashamed at myself for being out of contract on my iPhone 4 but not wanting to get a new phone until the 5 comes out...
Interesting economics lesson though:
If you bought a subsidized iPhone 4 in July 2010 for $200, and invested $250 in one share of AAPL, and spent $180 taking your girlfriend out for a nice dinner, today you would have a phone worth $300 on Craigslist, $643 worth of AAPL stock, and maybe something memorable with the girlfriend. If you instead bought the phone at the unsubsidized $630 price on a credit card at 18% interest, made the $10 monthly minimum payment, you would be $300 in the hole after selling the phone.

Very interesting indeed. It also brings out a point, there is a disconnect in the consumers' mind regarding costs.  On the one hand I spend less up front by getting a subsidized phone and data plan. On the other hand I will pay more up front if I get the phone and plan separately.  You cal tell them they will pay less if they go unsubsidized but they'll probably reply that they pay less now though if they do subsidized.  Ultimately most people only see that it is cheaper now. Who cares about overall.

 

Quote:
Originally Posted by Durandal1707 View Post

Because most US cell phone plans are a complete rip-off. The exception, of course, is T-Mobile's Value plans, where the plan is $20 less per month and you can then either just buy the phone at full retail price or finance it so that your plan costs the same as a subsidized plan until the phone is paid off, at which point it gets $20/mo cheaper. And it doesn't even usually take 2 full years — usually the plan price drops after 20 months or so. And when T-Mobile gets the iPhone next year, you'll be able to use this plan with an iPhone. Heck, you can take advantage of it right [i]now[/i] if you buy an unlocked iPhone, assuming you live in one of the areas where T-Mobile has refarmed their 1900 MHz spectrum to WCDMA.

 

Of course, the plan hasn't been as popular as it should be, due to customers who apparently failed 6th grade math and can't figure out that $200 up front + $20 extra for 20 months is a better deal than $200 up front and $20 extra forever, so this might be a "get it while it lasts!" sort of situation. :-\

Most people don't like math.  For the record, where I am we ALL pay full price for mobile phones and get plans unsubsidized. Meaning, there are NO subsidies, at all, whatsoever. And prepaid is very popular.

post #26 of 28
Quote:
Originally Posted by Durandal1707 View Post

Because most US cell phone plans are a complete rip-off. The exception, of course, is T-Mobile's Value plans, where the plan is $20 less per month and you can then either just buy the phone at full retail price or finance it so that your plan costs the same as a subsidized plan until the phone is paid off, at which point it gets $20/mo cheaper. And it doesn't even usually take 2 full years — usually the plan price drops after 20 months or so. And when T-Mobile gets the iPhone next year, you'll be able to use this plan with an iPhone. Heck, you can take advantage of it right now if you buy an unlocked iPhone, assuming you live in one of the areas where T-Mobile has refarmed their 1900 MHz spectrum to WCDMA.

Of course, the plan hasn't been as popular as it should be, due to customers who apparently failed 6th grade math and can't figure out that $200 up front + $20 extra for 20 months is a better deal than $200 up front and $20 extra forever, so this might be a "get it while it lasts!" sort of situation. :-\

I would change the bolded to "most US cell phone plans with the majors are a complete ripoff". The T-mobile plan you mention is OK, but performance is marginal. Straight Talk uses the AT&T network, but has $45 per month unlimited everything (or $30-35 per month if you don't mind limits). There are also a number of regional MVNOs that have decent plans.
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post #27 of 28
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Originally Posted by Red Oak View Post

Why would they reduce the cost to $0 if demand is high AND they have trouble supporting the network data requirements?   

The 4S is going to get a $100-$150 cost reduction (to the carriers) in the next 3 weeks.   That alone is enough to generate an ADDITIONAL 20-25% profit margin to the China Unicom.  That alone should be enough to solve this issue.  Plus, make it a $49 price point (vs. free),  and Unicom should be making a healthy profit 

I honestly don't understand their position.  There is a good chance they are simply trying to use this as leverage with Apple.  Which has about a zero chance of working

And if they decide to pull the subsidaries, go ahead and let them  

No one ever accused these Chinese companies of being well managed. In fact, as basically state owned enterprises, the opposite is true. As an expat living in China, I purchased my iPhone at full price in Hong Kong and only pay $15 USD a month for my voice and data plan on China Unicom.
post #28 of 28
Quote:
Originally Posted by drblank View Post

First off they have less than 30% market share.  China Mobile has 70%.  Now, obviously, these cell phone carriers are STILL trying to figure out how much data smartphone users actually use, since they keep adding features, and people are still trying to figure how to use them, how much to charge, etc.

I think that either this company is using this as a means to re-negeotiate their contract or just not be in a position to actually figure out how to compete.


They spent a LOT of money upgrading their system and they are competing against China Mobile which is HUGE.

We'll see what happens.

I think you are right, it's a negotiation ploy. As an expat living in China, smartphones are prolific in the major cities, and not just iPhones. So smartphones of all makes and types are putting demands on cellular data. Having said that, many consumers do tend to seek out wifi locations, which are plentiful, for their data use and are constantly using data on their phones when out and about with friends and family. It is quite common for a group of people to be at a bar, even with a live band, and they are all sitting their playing on their phones at the same time instead of actually socializing.
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