China Unicom reportedly threatening to drop iPhone subsidy next month

China’s second-largest telco, China Unicom, could abandon iPhone subsidy once its contract bundles expire in September, an Asian trade publication wrote on Friday, citing industry sources. The anti-subsidy sentiment is nothing new, but apparently China Mobile is unable to justify billions in prepayments to Apple and high investments in infrastructure in order to cope with fast-growing traffic because sales of contract iPhones reportedly have not met its internal expectations…

The hit-and-mix DigiTimes reports, quoting a story by China-based

China Unicom has not substantially profited from sales of iPhone 4 and has incurred a heavy financial burden from subsidies and continued investment in expanding network infrastructure to cope with fast growing traffic, the report said.

China Unicom is the world’s #10 telco and China’s only WCDMA operator, with more than 125 million subscribers.

Its 24-month contract-bundles of iPhone 4 signed in September 2010 are set to expire in September 2012, conveniently in time for the next iPhone’s arrival. That said, it’s entirely possible the carrier was employing scare tactics in order to push Apple into concessions as the company enters a sensitive product transition period next month.

But the report may not be telling the whole story as China Mobile’s 3G business has been loosing money for some time, so that could be the real culprit here.

I have no doubt that high smartphone subsidies put a financial burden on China Mobile’s 3G operation as prepayments made to Apple and other smartphone makers account for about 45 percent of its overhead.

But other carriers have good reasons to put up with high iPhone subsidy.

If Sprint was willing to bet the farm on the iPhone, I think China Mobile will be just fine.

On the other hand, as I noted earlier this morning, Apple is facing some serious challenges on the mid and low-end from fast-growing local brands that undercut Apple’s phone while beating it in terms of specifications.

This is the 1.33 billion people strong market and even though Apple and Samsung dominate, there are hundreds of millions of feature phone owners who are upgrading to mid-tier devices costing between $130 and $240.

It’s not that China Mobile will pass on the next iPhone (though anything is possible), but if it’s only going to offer unsubsidized iPhones costing an equivalent of $800, urban Chinese who typically work two months to earn that sum will hardly justify buying into the Apple ecosystem, likely turning to a bunch of Android cheapos.

What Apple badly needs is a $200 unsubsidized iPhone – not the recently repriced and three-year-old iPhone 3GS, but a brand new model.

Something with perhaps fewer features and engineered with price-conscious shoppers in mind who buy phones on a no-commit basis.