China Mobile iPhone talks break down; Apple now eyeing No. 2 carrier

Chinese news outlets are reporting this week that talks between Apple and China Mobile, the No. 1 carrier in China with 415 million subscribers, have broken down. Now, according to other news reports out of China, Apple and China Unicom - the No. 2 player without about 130 million subscribers - are in talks.

The breakdown with China Mobile reportedly came down to who gets to control the iTunes App Store. The news outlet Interfax China said there were three rounds of talks over an 18-month period between China Mobile officials and Apple executives, including CEO Steve Jobs and COO Tim Cook. The Interfax China report, citing an unnamed source, offers these details:

In the first round of negotiations, Apple asked for between 20 percent and 30 percent of China Mobile's revenues from iPhone users, which was rejected by China Mobile, the source said. In the second round, Apple offered to sell iPhones to China Mobile at $600 per unit and required that China Mobile subsidize iPhone service bundles offered to users. Again, the two parties failed to reach an agreement. The third and final round of negotiations also broke down over Apple's insistence that it, rather than China Mobile, sell iPhone applications directly to customers via its online store. (China Mobile President Wang Jianzhou) saw the offer as a threat to China Mobile's dominance of China's mobile Internet industry, as Apple rather than China Mobile would collect money directly from customers under the deal.

The report notes that, unlike other parts of the world where users pay for apps by credit card, users in China prefer to pay for extras via deposits in their mobile phone accounts, which would leave China Mobile playing a part in administering the purchase of iPhone apps.

Clearly, this is not the first time that Apple and company have played hardball with partners before. In the iTunes store alone, we've seen Apple go head-to-head with record labels, TV networks and movie studios. Remember when NBC pulled its programming from iTunes, only to have the two sides kiss and make up later? (Although it's unclear who blinked in this game of chicken) And remember that Apple's first choice for a wireless carrier in the U.S. was Verizon, not AT&T. But when Verizon and Apple clashed over terms of a deal, AT&T (then-Cingular) was standing there on the sidelines.

Sure, the pool of potential customers under China Unicom is smaller than the pool with China Mobile. But the integration of the iPhone with the China Unicom network could be easier. Fortune's Apple 2.0 blog reports:

China Unicom has an edge over its larger competitor: On May 17, it will launch China’s first 3G service based on the WCDMA (Wideband Code Division Multiple Access) protocol — the one Apple employs. That would allow China Unicom’s customers to use off-the-shelf iPhone 3Gs without modification. China Mobile, by contrast, is sticking with its home-grown TD-SCDMA (Time Division Synchronous Code Division Multiple Access) protocol for 3G service. In order for Apple to serve China Mobile customers, it would have to build a special Chinese iPhone with a different cellular modem chipset.

Last month, Apple patted itself on the back for selling 4.4 million devices in the December quarter, taking the number of devices "well ahead of the 10 million unit goal for the year that we set when we introduced the iPhone," CFO Peter Oppenheimer said in a conference call with analysts.

At one point last year, however, Piper Jaffray analyst Gene Munster had set an aggressive goal for Apple - 45 million iPhones by the end of calendar year 2009. Of course, that was before the global economy tanked, based on predictions that Apple would have introduced a family of two to three iPhone models by January 2009 and ink a deal with China Mobile by mid-2009.

As of now, that family of iPhones theory hasn't played out and the China Mobile deal isn't looking all that promising either.