iphone is the most hot product for year 2007.Apple said that it has sold 3.75 million iPhones through the end of last year, but AT&T has activated a bit less than 2 million phones. There was a moment of panic as investors imagined more than a million unsold iPhones piled up in the stock rooms of AT&T stores.
Upon reflection, several analysts have come to the conclusion that the vast bulk of these have been bought and unlocked to use on carriers other than AT&T in the United States and on European carriers who are Apple’s partners.
I was skeptical of this, as unlocking an iPhone is rather complex and risky proposition. But as I talked to Gene Munster, of Piper Jaffray, and A.M. Sacconaghi, Jr. of Sanford C. Bernstein, who were both convinced that there is widespread buying of unlocked phones, my skepticism abated a bit.
What about people who got the phones as Christmas presents and did not get around to activating them before the end of the year, I asked.
Mr. Sacconaghi said he believes that most people who got phones as gifts activated them right away.
“Typically people activate a phone within three days, and the holiday season is when you have the most time and if you are excited about a gift,” he said.
There are not, however, 1 million people who are going to steep themselves in the art of iPhone hacking. Rather, both analysts suggested that there are organized groups of gray market dealers who are buying up iPhones, unlocking them, and reselling them, largely overseas.
Mr. Munster, in fact, dispatched spies to monitor Apple stores in New York, San Francisco, and Minneapolis, who found that some 40 percent of the phones were sold to people who purchased more than one phone at a time.
“The majority of the people who were buying more than one phone were Asian, and they were bringing small buses of people who all buy more than one phone,” he said. Mr. Munster conjectured that many of the phones are being resold into Asia. It is hard to get an iPhone there and, he said, “With the value of the dollar, the cost of the phone is much less here.”
Mr. Munster estimates that of the 1.7 million phones not activated by AT&T 350,000 were sold through Apple’s partners in Europe, 512,000 were in inventory at AT&T and the European carriers, and 838,000 were sold and unlocked. Mr. Sacconaghi figures slightly fewer phones were sold in Europe and are in inventory, leaving 1 million unlocked phones.
I called Apple’s public relations department, which, as usual, declined to comment. On its conference call with analysts earlier this month, Apple said that a significant number of phones were sold and unlocked.
On the face of it, this isn’t good news for Apple. The company receives a payment estimated to be about $15 a month, from AT&T and other carriers, for iPhone accounts that are activated. So every unlocked phone is $360 of revenue forgone over the two year life of a contract.
But there are a few reasons why we shouldn’t shed a tear for Apple on this one.
For one, it shows great demand for the iPhone, especially because Apple has not made it easy for people deal in unlocked phones. With each software update it tries to close the software loopholes that allowed previous versions to be connected to unauthorized carriers (although hackers seem to always find new unlocking methods within weeks). And it restricts the number of iPhones people can buy at any one time.
Mr. Sacconaghi said it is possible that the gray market dealers, however, have overestimated demand and have a big inventory backlog themselves.
What is more, both Mr. Munster and Mr. Sacconaghi are convinced that Apple actually makes money on the iPhone without taking into account the payments from the carriers. Mr. Munster estimates that gross profit on each iPhone is about $50. That doesn’t take into account costs like development and marketing, but it’s still amazing given the product is so new in its life cycle. (The cost of making a product tends to go down faster than its selling price.) If true, Apple’s effective profits from the iPhone, taking into account the payments from carriers, are huge even if diluted because a quarter of the phones are being unlocked.
Moreover, Apple has several ways to reduce the percentage of phones that are being unlocked. The most significant plan is simply to expand the number of countries in which it sells the phones, giving buyers in Asia and Latin America a legitimate alternative to gray market dealers. If Apple still found all this to be a significant problem, it could certainly require customers to sign up for a service plan before they left the store. And it wouldn’t be a surprise if the next generation of iPhone, which Mr. Munster expects over the summer, has even tougher ways of keeping the phones locked.
Apple has several ways to reduce the percentage of phones that are being unlocked. I dont think that its necessary to restict.Its time to open market....open product...no monopoly act.no lock