iPhone unlocking explodes despite Apple's countermeasures

There's no doubt that Apple has taken iPhone unlocking very seriously in the first six months of its life on the planet. Even so, it appears despite significant roadblocks, the unlockers are winning.

Each of the three times Apple and AT&T have reported their iPhone numbers since July, there has been a gap between the number of iPhones sold by Apple and the number of iPhones activated for AT&T's network. During the first weekend of iPhone sales, the gap was 124,000 units. At the end of the third quarter of the calendar year, it had grown to 300,000 iPhones. And last week, Apple and AT&T revealed that gap had increased five times over in the fourth quarter, to 1.7 million units.

There's one easy explanation this time around for part of the gap: The fourth quarter marked the first time the iPhone was available through other carriers, namely Europe's O2, Orange, and T-Mobile. Still, that accounts for only 350,000 iPhones, according to various estimates, leaving 1.35 million missing iPhones to explain.

Some analysts think around 1 million of those iPhones have been purchased with the intention of unlocking them to run on other cell networks. If those numbers are true, that means iPhone unlocking exploded in the fourth quarter despite two steps taken by Apple to reduce the number of iPhones bought with unlocking in mind.

Last week Toni Sacconaghi of Sanford C. Bernstein thought a demand issue was to blame, believing that unlocking couldn't be much more widespread than Apple Chief Operating Officer Tim Cook had estimated back in October, somewhere around 20 percent of all iPhones sold. That would mean AT&T stores were starting to pile up an inventory of unsold iPhones.

But his fellow analysts jumped all over that presumption on Friday and Monday, declaring that unlocking is a much more prevalent practice than it seems, which would mean iPhone inventory is within normal levels. Mike Abramsky of RBC Capital Markets estimated that unlocked iPhones account for as many as 30 percent of all iPhones sold in the world last year, and Sacconaghi later upped his estimate to 27 percent, or sales of 1 million unlocked iPhones in 2007.

So how has Apple tried to curb unlocking? First of all, it imposed limits on the number of iPhones that could be sold per person to two units in late October, and required that buyers use a credit card. This was done to discourage unauthorized resale of the iPhone, especially among resellers who purchased iPhones for resale in countries that use GSM networks but where Apple has yet to launch.

More important, as Apple got ready for the launch of the iPhone in the U.K. and Germany in early November, the company changed the way the iPhone loads software from flash memory to only permit only certain kinds of software from loading into the main memory. This is called the bootloader, and moving to a new version of the bootloader automatically caused problems for the iPhone unlocking community.

Up until that point, it had been relatively easy to unlock the iPhone by just downloading software and buying new SIM cards from any number of different outlets. But the release of those new iPhones created a roadblock for the hacking community that it still hasn't managed to solve through software. iPhones purchased prior to November 9 with older bootloaders can still be unlocked, even after they have upgraded to the 1.1.2 firmware that was released on the same day as the iPhones with the new version of the bootloader.

This was an extremely frustrating development for the unlockers, although work continues on finding a software fix. Post-November 9 iPhones can be unlocked using a couple of hardware methods that involve disassembling and tweaking the iPhone itself, or cutting away a little piece of your SIM card and taping it to another SIM card. As you might have guessed, those aren't exactly foolproof, and anyone who tries runs a serious risk of inflicting permanent damage.

But despite these hurdles, somehow many more iPhones were unlocked during the fourth quarter as were unlocked during the third, if the estimates are accurate. Analysts accepted Apple and AT&T's explanation for the gap during the initial weekend that a significant amount of iPhones were in transit as the weekend (and the quarter) came to a close on Saturday night, and the widespread activation problems experienced that weekend certainly could account for some of that gap.

But if only 250,000 to 300,000 iPhones were bought with the intention of unlocking during the third quarter, that means 700,000 to 750,000 were bought during the fourth quarter if the estimate of 1 million unlocked iPhones is correct, despite Apple's attempts to make life harder for the unlocking community. Put another way, overall iPhone sales doubled from the third quarter to the fourth, and iPhones destined for resale and/or unlocking almost tripled.

It's pretty easy to find an unlocked iPhone on eBay, and they are selling for between $450 and $700, well above the locked iPhone price of $399. And given these numbers, it's not hard to imagine finding plenty of unlocked iPhones in above-board and underground shops around the world.

Unlocked iPhones don't hurt Apple in the short term, as the company still gets the hardware revenue and the walking advertisement for Apple that is an iPhone user. It's the opportunity cost of the unlocked iPhone that really hurts Apple; the sweetheart deal it signed with AT&T entitles the company to a portion of the revenue taken in by AT&T for data use over its network.

And it will also make it harder for Apple to roll out the iPhone with exclusive carrier partners around the world. Apple is said to have a five-year exclusive deal with AT&T for iPhone distribution in the U.S., and if unlocking is rampant, AT&T's going to start wondering why they are giving Apple so much money on the revenue earned from locked phones when so many are going unlocked.