1.7 million 'missing' iPhones

2008-01-29 12:06

San Francisco - A significant number of customers appear to be buying Apple Inc's popular iPhone with the intention of unlocking the device to use on a range of wireless networks.

Several Wall Street analysts raised questions on Monday about the number of devices that have been modified to work with other wireless networks and what impact those modifications could have on Apple's business in the future.

Unlocking an iPhone allows the device to work on networks other than the one operated by AT&T, Apple's exclusive carrier partner in the US.

The questions stem from the companies' earnings reports last week. Apple claimed it had sold 3.7 million by the end of 2007, while AT&T said it had signed up nearly two million iPhone subscribers by year-end.

Those numbers leave approximately 1.7 million devices missing in action. Some of these were sold in Europe, though analysts believe that number falls somewhere between 300 000 and 400 000. And some of the devices may have been sold but not yet activated for telecommunications.

Not an easy task

But analysts believe more than one million devices may have been sold and unlocked, accounting for as much as one-quarter of the company's total iPhone sales to date - a number one analyst called "astounding".

The issue of unlocked iPhone units becomes more interesting because it brings up issues such as customer loyalty to a wireless carrier and how much impact would be felt at Apple in the coming years.

Toni Sacconaghi of Bernstein Research said in a report on Monday that unlocking could help Apple reach its goal of selling 10 million units this year. However, he added that unlocked phones hurt the performance of the company's iPhone business, since they generate no recurring carrier payments.

For every one million iPhone units unlocked, Apple forgoes $300m to $400m in future revenue and profit, Sacconaghi wrote.

Unlocking an iPhone isn't easy. The device comes with just two buttons, one to turn it on and another on the iPhone face that activates the device's screen. To unlock the iPhone, a user needs to break the device open, being careful to avoid inflicting permanent damage, and make changes to both the hardware inside the casing and the software to override the links to AT&T's network.

Keith Bachman of BMO Capital Markets said in a report on Monday that he was "concerned" about the high number of iPhone devices that have been unlocked. He believes that number to be about 20%, he said, or approximately 750 000 of all the iPhone units sold through December. Bachman had earlier estimated that Apple would take in about $34 a quarter in average revenue per customer based on all of the phones being locked into the AT&T network.

'We're new in the business'

"We believe that Apple will be able to lower the amount of unlocked phones by increasing the availability of phones to many more geographies, and by lowering the price differences between markets," he wrote.

With only an estimated 80% of iPhone sales generating that future revenue from customers, Bachman lowered his 2008 estimates for Apple to $4.90 a share on $31.54bn in sales from a previous forecast of $4.97 a share on revenue of $31.7bn.

Not all Apple observers are taking the rate of unlocked iPhone units as a bad sign. Mike Abramsky of RBC Capital Markets, who predicted that 25% to 30% of the devices sold to date have gone unlocked, said that unlocked phones, "though a headache for carriers, are financially positive for Apple, and in our view bode well for global iPhone demand, and for Apple exceeding its 10 million, 18-month target," Abramsky wrote in a report on Monday.

An Apple spokesperson refused to comment on the issue of unlocked phones. However, Chief Operating Officer Tim Cook discussed the matter briefly on a conference call last week.

Cook said the company believes the number of Apple phones that were bought with the intention of being unlocked "was significant in the quarter, but we're unsure how to reliably estimate the number".

Cook also referred to Apple's relative lack of seasoning in the cellphone market, saying, "We're new in the business. We're unsure of when all the recipients will activate."

- Dow Jones