THE new iPhone and the way it will be sold may shut down a small industry that arose to make the first version available around the world.
The original iPhone, which launched in June last year, was initially available only in the United States and only for use on AT&T Inc's network. In little more than a month, however, enterprising hackers found a way to "unlock" the phone to make it usable on other networks, including networks in other countries.
IPhones soon flowed out of the United States, and analysts have estimated that one-third to one-half of the phones sold never made it onto AT&T's network.
"I saw it in action and I had to have one," said Ernesto Zeivy, a 50-year-old restaurant owner in Mexico City. He had one friend buy an iPhone for him in San Diego for US$500 and another unlock it using software downloaded from the Internet.
Apple announced a new iPhone earlier this week for use on 3G data networks. It will stem the flow of unlocked phones in two ways.
First, the phone will be sold in more countries. Apple added five countries beyond the US for the first phone, but the second one will go on sale in 22 countries and regions on July 11. Apple has said it will add more countries at a rapid clip and reach 70 by the end of the year. That takes away one of main incentives for unlocking.
Second, Apple is abandoning its unusual sales method. Customers could buy an iPhone from a carrier or from Apple without activating it on a service plan, enabling customers to unlock the phones ?? and never sign up with AT&T.
"Anyone can unlock it without paying anyone anything," said Blas Caballero, another iPhone user in Mexico. "It's so easy. A minute and a half, and all you have to do is push a button," said the 32-year-old bar owner in Mexico City. He bought his iPhone in New York.
The new phone will be subsidized by carriers, which accounts for its lower price: US$199 for the 8-gigabyte model, down from US$399. This brings the phone's marketing in line with standard industry practices.
The carriers plan to make back what they spend on the subsidy through service fees, which means they will probably require two-year service contracts from everyone who buys the phone. AT&T said buyers will have to activate the service before leaving the store with their iPhone.
"It's looking pretty bleak for unlockers," said John McLaughlin, founder of Uniquephones.com, a New York-based company that sells unlock codes for cell phones.
Apple tried to secure the device technically with its software updates, but couldn't. It will be hard to get around the requirement for buyers of the new phone to sign up for service in the store, McLaughlin said.
Freeit4less, a company based in Syracuse, Utah, has posted prices on its Website for unlocked 3G phones at US$100 above store prices, but Chief Executive Kyle Jourdan said the company is not accepting any pre-orders given the uncertainty.
"We're just crossing our fingers and hoping for the best," Jourdan wrote in an e-mail. He speculated that Apple or AT&T may sell unsubsidized phones, which would leave an opening for his company. Freeit4less has sold about 121 unlocked first-generation iPhones and 5,104 licenses for unlocking software, Jourdan said.
US federal law allows consumers to unlock their own phones. But selling someone the means to unlock another person's phone may be illegal. At least one US carrier has won civil cases, not involving iPhones, against unlocking businesses.
AT&T charges customers who break a two-year contract within the first month an early termination fee of US$175, plus the US$36 activation fee. That would bring the cost of the new iPhone to US$411 for an unlocker, just slightly more than the old model's US$399 price.
That math may mean it is still attractive to unlock iPhones for use on other networks and that AT&T will lose money on unlockers.
But Ralph de la Vega, head of AT&T Mobility, said AT&T and Apple are working on "penalties" for users who buy phones and don't activate them within 30 days. It could also bar repeat buyers.
Smaller, Faster, Cheaper
Apple Inc Chief Executive Officer Steve Jobs announced the first significant makeover to the iPhone, unveiling a faster and cheaper handset that may convince business users to switch over from the BlackBerry.
The new phone's features include:
Offers 3G, or third-generation service, which is twice the speed of the current network.
Features built-in GPS that can track users as they move.
Will be available in 22 countries and regions on July 11, and more than 70 countries and regions by year's end.
Eight gigabyte model will sell for US$199 (down from US$399) and 16-gig model for US$299.
New model has thinner edges, 16-gig version comes in either black or white.
Revamped software, called "Mobile Me," will allow all iPhones to have e-mail forwarding plus automatic calendar and contact updates.