Apple on the lookout for 1 million unlocked iPhones
29-01-2008
by The Register

About 27 percent of the iPhones sold in 2007 are being operated on unauthorised wireless networks, according to research.

That works out at about 1 million handsets. The unlocked phones are used largely in regions where the must-have device isn't officially sold, according to a report issued by Bernstein Research analyst Toni Sacconaghi. He says the appetite for the modified phones has given way to a cottage industry that sells hacks or phones that come out of the box unlocked. Most phones originated in the US where, thanks to current currency exchange rates, prices are comparatively low.

AT&T reported having about 2 million iPhones on its network as of the end of the year. Over the same period, Apple said it sold 3.75 million units. These figures caught the eye of Sacconaghi last week, prompting him to write an initial research note. "Significant interest" in that note led the analyst to dig deeper into the matter. As a result, he pumped out fresh figures on Monday that include information gained from talking to channel partners and other sources.

"We now believe that 315,000 iPhones were sold in Europe (down modestly from our previous estimate), leaving 1.45 million iPhone units missing in action -- either sitting in channel inventory or being used 'unlocked,'" Sacconaghi wrote this week.

Subtracting 480,000 units of channel inventory, Sacconaghi reckons about 1 million phones had been unlocked, up from a previous estimate of 750,000.

The figure represents quite the predicament for Apple.

Unlocked phones represent a significant drag on the profitability of the device. With Apple receiving USD300 to USD400 in carrier payments for each iPhone sold, they generate 50 percent less revenue and up to 75 percent less profit than normal. The 1 million phones translates into as much as USD400 million in lost revenue.

If 30 percent of the 10 million devices Apple expects to sell in 2008 are never activated, sales are lowered by USD500 million for each of the two years the carrier contract would have been in place and earnings per share decline by USD0.37.

Unlocked phones also weaken Apple's hand when negotiating terms with prospective new carriers. That's because the promise of being the exclusive network carries less weight.

At the same time, a sale is a sale. If Apple clamps down too much on unlocked phones it forgoes all the revenue it would have made selling them. And equally unappealing, it risks missing its lofty goal of selling 10 million devices by the end of this year.

Apple has gone to great lengths to make it hard to unlock iPhones. Updates to patch security bugs typically re-lock the handsets. So far, hackers have managed to defeat the restrictions. Less than a week after the most recent version of the firmware was released, so-called jailbreaks that unlock the phone were circulating online.

The Register and its contents are copyright 2007 Situation Publishing. Reprinted with permission.