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Wednesday, March 24, 2010, 06:30 am PT (09:30 am ET)

Despite iPhone launch, China Unicom struggles to grow 3G subscribers

China Unicom net profits fell 73 percent last quarter after the company failed to significantly increase its 3G subscriber base, despite the fact that it is the sole carrier of Apple's iPhone in the world's most populous nation.

China Unicom's surprise losses were announced Wednesday, with the massive year-over-year decline attributed to costs associated with creating its fledgling 3G network, according to The Wall Street Journal. Though China Unicom is the second-largest wireless provider in China, the carrier had just 4.1 million 3G users by the end of February, giving it the fewest 3G subscribers behind China Mobile and China Telecom.

China Unicom hopes to add more than 10 million 3G subscribers this year, and many believe the company's success hinges upon its ability to expand its 3G network. Playing an integral role in the growth of 3G is the company's agreement with Apple to carry the iPhone.

The iPhone 3GS debuted last October on the China Unicom network as part of a non-exclusive deal. But a high price when compared to the nation's gray market, along with a lack of Wi-Fi in the current model, led to a soft launch with just 5,000 units sold.

But sales have since picked up, as Apple revealed that more than 200,000 handsets were purchased as of early January. But 3G adoption at China Unicom has also slowed: According to the Journal, the carrier added 920,000 3G subscribers in December, 853,000 in January, and just 470,000 in February.

Apple and China Unicom's fortunes in China could improve with the expected release of an iPhone with Wi-Fi soon. The Cupertino, Calif., company is also said to have been in talks with rival carrier China Mobile on an agreement to carry the iPhone. China Mobile is the world's largest wireless carrier, with an estimated 475 million subscribers as of last year.

Analyst Katy Huberty with Morgan Stanley has predicted that Apple will introduce a new iPhone this year with a lower total cost of ownership. The total cost of ownership, including hardware and subscriptions, has been the greatest barrier to success in countries like China, she said.

In particular, Apple could sell 10 million units per year if the company were to introduce a prepaid iPhone model. But even without that option, Huberty expects Apple's smartphone presence in China to grow to 5 million per year.

Apple also plans to build 25 new retail stores in the nation, which will expand its presence and potentially boost sales. Apple has an estimated 2 million iPhones already in China, though most are from the gray market.