The reasons for that are twofold. Foremost, the iPhone is already killing it in China without China Mobile. And as much as Apple would like to put the iPhone on the world’s largest wireless carrier, it’s not going to do so unless it gets the terms it wants. And right now there’s some disagreement between the two companies over App Store revenue.

Industry sources tell Sterne Agee analyst Shaw Wu that China Mobile is looking for a cut of App Store revenue. Historically, Apple has never done this, and almost certainly doesn’t want to begin doing so now. And with 10 million unlocked iPhones already on China Mobile’s network, and the carrier encouraging them with gift cards for free Wi-Fi service (the iPhone isn’t compatible with the carrier’s TD-SCDMA 3G network), there’s little reason to rush into a deal, particularly one that will require it to produce a TD-SCDMA-compatible iPhone.

So Apple is sitting back and focusing its efforts on the 4G TD-LTE iPhone that will presumably succeed the 4S, and working to ensure that it will be compatible with China Mobile’s network. Presumably, by the time that device is headed to market, the two companies will have finally signed a deal. And in the end, that’s the best move for Apple. China Mobile has more than 628 million subscribers in China, and could potentially double Apple’s market share in the country.

“The total number of iPhones in China Mobile’s network has reached 10 million — and we didn’t pay any subsidies,” Jianzhou told Reuters, adding that the company is still working to ink an iPhone deal with Apple, hopefully one that will involve an LTE-compatible version of the device.

“We have not yet got agreement with Apple,” Wang said. “Apple promised to provide, when they develop the iPhone for LTE, that it will include TD-LTE. We are discussing the details.”

[Image credit: NeonPunch]

Discussing the carrier’s latest earnings with analysts today, China Mobile Chairman Wang Jianzhou said high-level conversations with Apple continue.

“I met Steve Jobs several times already, but we haven’t come to an agreement yet,” Wang said, according to Reuters. He offered no timetable for a deal, but once again stressed both companies are interested in inking one. “All I can say is, it’s a common wish of China Mobile and Apple to come to an agreement as soon as possible,” he said.

According to Ticonderoga Securities analyst Brian White, China Mobile has more wireless subscribers than any carrier in the world, well over 600 million. And despite the lack of an official agreement with Apple, it has some four million iPhone owners accessing its network via a special mini-SIM card. Which bodes well for the device when it officially launches on the carrier.

If that’s the case, it’s great news for Apple, as a deal with China Mobile would greatly accelerate iPhone adoption. Said White, “This would represent a landmark agreement for Apple, providing the company with access to the largest wireless carrier in the world, with 611 million wireless subscribers at the end of May or 68 percent of the total China wireless market.”

[Image Credit: NeonPunch]

During a Thursday news conference, China Mobile Chairman Wang Jianzhou said the two companies have reached some sort of consensus on the type of iPhone to be offered by the mobile services provider–a 4G TD-LTE version of the device.

Which is both good news and bad for China Mobile.

Good news in that it appears the carrier will finally get the iPhone, bad news in that the version it’s evidently getting won’t run on its current 3G TD-SCDMA network, but on its next generation 4G TD-LTE network, which won’t be fully lit up for 12-18 months. But when it is fully operational, and the carrier is able to sell an iPhone compatible with it, expect a surge in sales of the handset.

[Image Credit: NeonPunch]

Jefferies & Co. analyst Peter Misek too says the device will be largely similar to the iPhone 4, but with significant improvements under the hood.

“We believe the likelihood of the iPhone 5 launch in September including LTE [Long-Term Evolution] is now remote,” Misek said in a note to clients. “According to our industry checks, the device should be called iPhone 4S and will include minor cosmetic changes, better cameras, A5 dual-core processor, and HSPA+ support.”

These specs are essentially the same ones Concord Securities analyst Ming-Chi Kuo reported back in April, so Misek’s not particularly telling us anything new, with the exception of one very interesting detail. He expects Apple to launch the the iPhone 5/4S on a handful of new carriers, Sprint, T-Mobile, and China Telecom among them.

“Industry checks indicate AAPL has or is about to announce new carrier deals in time for the holidays with T-Mobile and Sprint,” Misek wrote. “Additionally, we believe another China carrier could launch the iPhone in the next 12 months. On Apple’s last earnings call, management responded to a question about launching the CDMA iPhone at other carriers as “we are constantly looking and adding where it makes sense, and you can keep confidence that we’ll continue to do that.”

Because while the country is a key global market, doing business there is rife with all kinds of thorny challenges and troublesome compromises.

So, despite its progressively weaker denials, numerous sources said Facebook is preparing to launch in China. Now, the social networking giant is working out the details of a localized Chinese offering and trying to execute them as quickly as is prudent.

Perhaps the most important detail of Facebook’s planned China offering is that it will likely be connected to the greater international Facebook community, rather than operated as an independent social network.

While some had advised Facebook to start with a closed Chinese service, sources said the company seems inclined to launch it as a network linked to the rest of the world.

That’s not a decision without controversy, due to the strictures of operating within an authoritarian state.

When Facebook users outside China connect with users inside China, sources said they will need to click through a warning that any material visible to Chinese users may also be visible to the Chinese government.

Over the past few weeks, NetworkEffect has spoken to numerous sources in and around Facebook about how Facebook.cn will come to be.

Picking a Partner

As has been reported elsewhere, Facebook will almost certainly launch its China version in partnership with Baidu.

While Facebook insists that no deal has been signed with anyone, sources within and around the company described Baidu as the most serious competitor.

Alibaba had also been in the running, but sources said its leaders had voiced disagreement with Facebook’s vision for connecting Chinese users to one global social graph, rather than first starting with a closed system.

Alibaba advised the more conservative approach, given that the Chinese political situation is currently quite tricky and the U.S. government would likely find fault with Facebook seeming to play any role in censoring its users in China, said sources.

A source familiar with those talks said of Facebook’s inclination to go with Baidu over Alibaba, “It was an issue of Mr. Right Now instead of Mr. Right.”

Other partners considered included Sina, Tencent and China Mobile, but Sina and Tencent have their own social offerings that were judged to be too competitive with Facebook, said sources.

In the meantime, Baidu–often called the Google of China–is very much like Google in that it has little in the way of social strategy.

Facebook, led by its CEO Mark Zuckerberg, has increased its sense of urgency about having a presence in China. Zuckerberg visited China in December, where he met with entrepreneurs from Baidu, Sina and China Mobile.

Baidu leaders then came to visit Facebook twice in February, at which point some say a deal to work together was struck, although Facebook emphatically denies any official papers have been signed.

Facebook’s current official statement on the matter: “We are currently studying and learning about China, as part of evaluating any possible approaches that could benefit our users, developers and advertisers.”

Baidu had no comment.

The Perfect Time Is Never

Facebook, which is currently blocked in China, finds the market hard to resist despite the ethical implications of cooperating with its government. Zuckerberg said in an interview at Stanford last fall that Facebook determined in 2010 that China was one of the four remaining target countries it was not yet “winning or on a path to win,” along with Korea, Japan and Russia.

Of China, Zuckerberg said specifically: “How can you connect the whole world if you leave out 1.6 billion people?”

Leaders at the company–whose mission is to “make the world more open and connected”–feel it is important to include Chinese users as part of the larger global social network, rather than keeping them separate. The solution they have apparently arrived at is to show the warning messages about connections between the larger Facebook network and the Chinese-censored Facebook.

That sentiment could be looked at as laudable–as it brings a modicum of openness to China–or cynical, in that it requires a major ethical compromise.

That said, Facebook already employs censorship in several countries it operates in currently, such as Pakistan and Germany, in order to abide by local laws.

“It was a very active dialogue inside the company, but there was no other way to operate in China,” said a person familiar with the discussions.

And there aren’t good examples of American Internet companies successfully operating in China for Facebook to draw inspiration from.

Google’s internal moral dilemmas about operating in China are well known. But while Google is primarily a search engine, Facebook’s product is a platform for communication and organizing.

The situation in China is even more challenging following revolutions in the Middle East and North Africa that have been closely tied to Facebook and social media.

Facebook has been careful not to claim any credit for popular uprisings or to align itself as a force of democracy, but others outside the company have made those connections for it.

Facebook currently has about 400,000 active Chinese users, many of whom access the site by evading the so-called “Great Firewall of China” through use of virtual private networks.

Meanwhile, social sites within China are rocketing up in usage and becoming financially significant. Sina Weibo, which is much like Twitter, is said to have something like 100 million users.

And RenRen, the social network that has followed Facebook’s execution step by step, has filed to go public on the New York Stock Exchange with a $4 billion valuation.

Sources close to Facebook said that RenRen’s U.S. fundraising, in particular, is a significant motivator for Facebook to launch its China offering sooner rather than later.

“I would not discount the need for Facebook not to sit by and watch a significant competitor gain that much advantage,” said one person close to the situation.

Nuts and Bolts

Under discussions now taking place, sources said Facebook’s proposed plan could have Facebook and Baidu share the cost of setting up servers in China, and share revenue from the local version of the site. The local partner, Baidu, would presumably manage the censoring of the site and ongoing dealings with Chinese authorities.

As described above, when users outside China opt to connect to those inside China, they would see a warning message about the Chinese government.

As we all know, users are notoriously good at clicking through pop-up warnings without reading them, although this one is sure to get more notice.

Facebook could also use a combination of what it calls input filters and display filters, where Chinese users won’t be able to post or view content that’s objectionable to the Chinese government, but the rest of Facebook can run normally, sources said.

It will be a somewhat complicated technological endeavor to ensure that non-Chinese portions of the site don’t get stored in China.

Finally, Palo Alto, Calif.-based Facebook is considering sending a small group of its employees to help manage operations, but sources close to the company said this issue is still being debated due to safety considerations related to China’s oppressive government.

Ready, Set, Controversy

Net Jacobsson, who led Facebook’s previous effort to enter China–a translated version of the site that was launched around the time of the Beijing Olympics and was live for only a few days before being blocked–said in an interview with NetworkEffect that it’s not just entering China that’s difficult, but what comes after.

Jacobsson is no longer with the company and said he does not have direct knowledge of its current plans.

In addition to complying with rules forbidding political speech, gambling and pornography, as well as government requests for user information, American companies operating in China have to deal with ruthless local competition and incensed and vocal politicians in the United States.

“It will be difficult just trying to manage those two different worlds in a world that is so transparent,” Jacobsson said.

Obviously, Facebook getting involved in censorship in China will be a difficult concept for many people to swallow. In China, censorship is largely expected and normal and citizens are used to reading between the lines.

In the U.S., it’s considered a serious compromise of freedom.

Sources close to Facebook maintain that the company already censors some user contributions in accordance with local laws in Germany, Pakistan and Italy, so abiding by Chinese censorship rules is consistent.

But China’s size, importance and–more to the point–its suppression of free speech are unmatched.

(Please see the disclosure about Facebook in my ethics statement.)

People’s Daily, which Reuters reported Monday may be planning an initial public offering in Shanghai this year, launched a microblogging service last year and a search engine in December called Goso.com, appointing the former head of Google’s research institute in China as its chief scientist last month. Xinhua launched its own search engine, Panguso.com, in February in partnership with China Mobile, and CCTV has been operating an online video platform CNTV since the end of 2009.

“We cannot rule out the possibility that Panguso, like Goso, is a government tool to tighten control of the information search field,” an Internet user said on a Baidu online forum, under the name iaspecjack.

“Google studied how to find information … Baidu later studied how to find only parts of the information … Goso came in the latest and it studies how to not find information,” a user from Guangdong wrote on Chinese microblogging service Sina Weibo.

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The visit seems to have been a source of some sensitivity for Alibaba, for reasons that aren’t clear. Spokesman John Spelich, who is pictured in one of the photos along with Mr. Zuckerberg and Mr. Ma, declined to comment Thursday on whether or not the visit took place.

Officials at Baidu, Sina and China Mobile have been less sheepish about their meetings with Mr. Zuckerberg, whose visit has generated much excitement among Internet industry executives and enthusiasts in China. Indeed, while the government blocks access to Facebook from within China, many Chinese Internet users have welcomed Mr. Zuckerberg, whose wealth (and his Chinese-American girlfriend) have helped make him famous among China’s urban youth.

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Mr. Zuckerberg on Wednesday visited the offices of Sina Corp., a leading Chinese Web portal, and met with its CEO, Charles Chao. That followed a meeting Tuesday with Wang Jianzhou, chairman of state-owned telecommunications carrier China Mobile Ltd., and a visit Monday with Robin Li, CEO of Baidu Inc., at the Chinese search company’s headquarters.

The trip appeared to be an effort by the 26-year-old to learn more about the Chinese market, rather than discuss any specific business proposals. But it came as the Facebook founder openly has discussed a desire to get into China, where the government has blocked access to the site since last year.

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State-owned China Mobile, which had about 570 million subscriber accounts as of September, has long been China’s preferred carrier. But the company’s subscriber growth has slowed as the government has rolled out efforts to restructure the industry and make it more competitive.

The most recent move may provide a boost for China’s two other carriers, which are also state-owned: China Unicom, which had about 160 million subscriber accounts as of September, and China Telecom, which had about 86 million mobile subscriber accounts as of October. China Unicom has been hoping to make the most of some competitive advantages, including its license to operate a mobile network using WCDMA third-generation technology, which is compatible with in-demand handsets like Apple’s iPhone.

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Foreign companies have few possible paths into China’s telecom sector, which is dominated by the giant state-owned parents of China Mobile, China Unicom (Hong Kong) Ltd. and China Telecom Corp. Investing in those Hong Kong-listed units, like Vodafone and others have done, grants little influence over the operation of their parent companies and doesn’t license a foreign company to offer telecom services in China.

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Xinhua, in a news story about itself, said Thursday it signed a framework agreement with China Mobile, the world’s largest mobile carrier by subscribers, to launch a search joint venture. It will “make full use” of Xinhua’s position in media content and China Mobile’s user base, Xinhua said, suggesting the venture will also promote Xinhua news articles.

The move comes after the People’s Daily, the official mouthpiece of the Communist Party, in June launched a beta search engine, dubbed “People’s Search” in Chinese. The search engine has a snappier and perhaps more capitalistic English name, Goso, which might sound to a bilingual listener like “go search,” since the sound “so” means “search” in Chinese. (The newspaper’s online portal also offers a Chinese microblog service, called “People’s Microblog.”)

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The Wholesale Applications Community, or WAC, was launched in February as a joint venture between 24 operators, including U.S.-based AT&T Inc. (T), Norway’s Telenor ASA and China Mobile Ltd.

The community will act as a wholesaler, it said Tuesday, testing and certifying applications from third-party developers and sending them on to the participating operators’ application stores where consumers can buy them. The nonprofit organization said it will charge a small transaction fee to cover its costs.

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Speaking at the annual shareholders meeting today, CEO Wang Jianzhou said the company has a keen interest in the iPad, suggesting that a distribution deal for the device may be a topic of discussion in talks China Mobile (CHL) claims to be having with Apple (AAPL) about developing a TD-SCDMA-capable iPhone.

It also suggests that China Mobile may be getting a bit desperate for Apple’s hardware now that a new version of the iPhone that supports both 3G and China’s homegrown WAPI wireless standard appears to be headed to China Unicom (CHU), Apple’s carrier partner in the country. This is, after all, the second time this spring we’ve heard about China Mobile “expressing interest” in the iPhone and iPad.

“We’re hoping we’ll come to an agreement on the iPhone as soon as possible,” Wang said. “We will continue to express our interest in the iPhone. But not just the iPhone, also the iPad.”

Of course, China Mobile (CHL) has been expressing interest in the iPhone for years now, with little to show for it. But perhaps the company is feeling a new sense of urgency now that rival China Unicom (CHU) and Apple (AAPL) are rumored to be discussing plans for a Wi-Fi-enabled version of the iPhone, something that was previously impossible because of a government regulation prohibiting the sale of Wi-Fi devices that don’t support China’s homegrown WAPI wireless standard.

As iPhonAsia.com’s Dan Butterfield recently noted in an interview with NeonPunch, “China Mobile is already suffering leakage of grey-market iPhone subscribers who are ‘upgrading’ to China Unicom’s faster WCDMA 3G network. Grey-market iPhone owners had heretofore been using their real (but illicitly obtained) iPhones on China Mobile’s EDGE 2G network. If the rumored (fourth gen) iPhone for China Unicom includes the WAPI/WiFi combo, this could greatly accelerate iPhone adoption and put pressure on China Mobile to respond with an iPhone offering of their own.”

[ Image Credit: NeonPunch]

According to China Unicom Chairman Chang Xiaobing, the two companies are discussing plans to debut a Wi-Fi-enabled version of the iPhone, something they couldn’t do previously because of a government regulation prohibiting the sale of Wi-Fi devices that don’t support China’s Wired Authentication and Privacy Infrastructure wireless standard.

Evidently, Beijing has recently revised that regulation and now permits the sale of Wi-Fi phones in the country as long as they also support WAPI, and this change has reignited talks between the two companies.

“I know that in the market there is hope we will offer an iPhone with Wi-Fi,” Xiaobing told reporters attending the annual session of the National People’s Congress. “We have been holding talks with Apple in this area.”

Whether the talks go anywhere is another question. As Dan Butterfield observes at iPhonAsia, an iPhone that supports two different wireless standards would require Apple (AAPL) to customize the device for the Chinese market, something it has been loath to do in the past.

“It runs against Apple’s DNA to build a special model iPhone solely for one market…even if that market is China,” Butterfield writes.

“But,” adds Butterfield, “…never say never! The current model iPhone for China Unicom is already a special production run (no WiFi chip + many ‘for China’ apps preloaded). If China Unicom commits to a sufficiently large iPhone pre-purchase, then Apple may entertain the idea of a WAPI/WiFi iPhone.”

Beijing-based, state-owned China Mobile is the leading wireless service in China and boasts the greatest number of mobile subscribers, with 522 million customers as of Dec. 31.

In mid-January, China Mobile said it would begin the rollout of its 4G network at the Shanghai Expo in May. The company said it would run trials for users from May to October.

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China Mobile, the world’s largest cellular carrier by subscribers, didn’t elaborate on the probe. The Web site of the state-run Xinhua news agency said Saturday that the Communist Party’s Central Commission for Discipline Inspection is investigating Mr. Zhang for “suspicion of serious violation of discipline,” language that is generally code for suspected corruption. The two-sentence report cited a commission official.

Rainie Lei, a China Mobile spokeswoman, said Saturday that the probe would have no impact on the company’s operations. Mr. Zhang couldn’t be reached for comment.

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The company joins China Mobile Ltd. in offering BlackBerry devices. The agreement also could help China Telecom gain ground against China Unicom (Hong Kong) Ltd., which offers Apple Inc.’s (AAPL) iPhones.

China Telecom spokesman Jacky Yung said Monday the company is working out the practical arrangements with RIM. It doesn’t have a timetable yet for when it will start offering the BlackBerry devices.

He also said the company is still in talks with Palm Inc. (PALM) to offer Palm’s handsets in the mainland.

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