Unlocked iPhones: Bane and Boon for Apple

by Thomas Penberthy

iPhone unlockers, while costing Apple millions in subscription-derived revenue that the company shares with authorized carriers, are playing a vital part in growing the iPhone market. Owners of unlocked iPhones are the epitome of “early adopters;” customers who try current technology ahead of the wave, influencing buying decisions in their peers and stoking demand ahead of Apple’s official entry into a given market. They collectively represent an international beacon of sorts, offering Apple marketing assessment and revenue with no associated marketing or support costs.

Both Apple COO Tim Cook and CFO Peter Oppenheimer have acknowledged this benefit, even though each “locked” iPhone brings Apple somewhere between $288 - $432 in monthly subscriber fees from the worldwide mobile carriers with which Apple partners.

Apple states in its SEC filing from 2007: “If … an iPhone is ‘unlocked’ from an authorized carrier’s network, the Company would not receive payments related to that iPhone from such carrier, which could have a material adverse effect on the Company’s future financial condition and operating results.”

But as we recently reported, both Cook and Oppenheimer addressed the issue of unlocking to different audiences - Cook at a Goldman Sachs investor’s conference in February said “I look at this ‘problem’ with a little bit of a smile. Having people stepping over each other for the phone isn’t a bad thing.” Oppenheimer summed it up thusly: “We view this is as a positive indicator in demand and interest in the iPhone.”

The iPhone, different than any other Apple product, commands both a premium retail price and a premium back-end payment for each month the iPhone is active. For Apple’s Chief Financial Officer to say that iPhones not providing this revenue are “positive indicators” belies a broader strategic mindset.

Apple stated that in the quarter ending in January 2008 that it had sold 2.3, million iPhones, bringing the all-time figure to 4 million. AT&T (US) and O2 (UK) claim to have just over half that number of users actually active on their networks, and these two markets likely claim the vast majority of “locked” iPhones in use, with Orange in France and T-Mobile in Germany following. If we assume that the almost 2 million other iPhone owners are a) using them on other networks and b) would not have purchased an iPhone if they couldn’t, then this customer base represents upwards of $500 million in retail sales for Apple, a welcome addition to any quarterly report.

A community of rebels

Prior to the firmware 1.1.1 release in September 2007, Apple posted strong warnings that applying the upgrade could render unlocked iPhones irretrievably inoperable, and indeed many unlocked iPhones were temporarily “bricked,” when uninformed or daring users applied the upgrade anyway. Reports surfaced of Apple retail personnel denying users seeking service for unlocked, bricked phones.

This sent a strong message from Apple to the unlocker community: if you unlock, you are on your own.

This stance placed users of unlocked iPhones in a position that resonates with many Mac users: a community of rebels. No one should appreciate this fringe mentality more than Steve Jobs himself, who famously kicked off the original Macintosh development effort flying the Jolly Roger.”

A third party development community quickly emerged, eventually complete with an unofficial iPhone Developer Kit from O’reilly Publishing. Despite Steve Jobs stated position that he would thwart jailbreakers, the latest public iPhone OS release can be jailbroken with a download and a few clicks, thereby enabling access to the hundreds of available third party applications that have been created and upgraded months in advance of Apple’s SDK. And unlocking the iPhone - once a task requiring UNIX savvy, hours of dedication, and a certain amount of luck - is just a checkbox in the jailbreaking process that takes all of 5 minutes. This obviously means more iPhone sales where none would have existed before, which looks good on the bottom line, impressing both Wall Street and potential partners alike.

Can you hear me now?

Country-specifc sales figures can be used by Apple as a bargaining chip when entering into negotiations with potential partners in new markets, creating a stronger negotiating position. Apple can now walk into a meeting and suggest that the network carrier look at its network access logs to see how many iPhones are already on its network using the IMEI records each GSM carrier keeps. This tells the carrier that there’s already demand, and again strengthens Apple’s negotiating position.

Another component making unlocked iPhone sales attractive to Apple’s financial analysts is the reduced post-purchase support costs for Apple. Once a user unlocks the phone (voiding the warranty), Apple is free of its end of its customer service commitment: no tech support, no returns, no service.

The network of unlockers and those using unlocked iPhones are akin to (though exponentially larger than) Guy Kawasaki’s ragtag band of Mac evangelists, singing the praises of the iPhone in markets Apple has yet to tread, thereby providing - for free - powerful word of mouth marketing for Apple.