On the Trail of the Missing iPhones

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The idea was that customers would turn around and activate a service plan with AT&T over the Internet.

But they can also choose to install bootleg software, easily available on the Net, and tinker with the guts of the phone so it can be used on other wireless networks. Some customers in the U.S. unlock phones because they don't like AT&T's service, but the vast majority are Apple enthusiasts abroad who can't get authorized service in their home markets.

INVENTORY ESTIMATES

There's evidence that Apple may have had a change of heart about the unlocking question. Soon after the iPhone was released last June, Apple issued an update to its iTunes software that rendered some unlocked iPhones useless. While the company has continued to add similar code into recent releases of iTunes, it clearly isn't looking too hard for ways to foil the efforts of its million or so unlocked customers. "Almost every iPhone you see on eBay is unlocked, so I don't think Apple is that concerned," says Ebeling.

Factoring out the unlocked phones still leaves 700,000 to 900,000 iPhones unaccounted for. About 315,000 of those—and possibly more—were sold through Apple's authorized carriers in France, Britain, and Germany over the holiday season, analysts estimate. An additional 100,000 or more customers may not have activated their phones yet with authorized carriers, either because they haven't gotten around to it or because they're waiting for their current wireless contracts to expire.

That leaves 300,000 to 500,000 iPhones in inventory, according to various estimates. Chris Whitmore, an analyst at Deutsche Bank (DB), figures Jobs & Co. typically sell 20,000 iPhones a day. That means Apple has 2 1/2 to 3 1/2 weeks of inventory. Sacconaghi cautions that if sales slow, that same inventory may take eight weeks to move. That's not overly much by AT&T's standards, since it typically carries four to six weeks of cell-phone inventory, but it's sky-high by Apple's lean standards.

AWAITING THE NEXT MODEL

The real question is what all of this means for overall iPhone demand. Sacconaghi figures Apple's first-quarter iPhone sales could be down as much as 40% compared with sales rates during the holidays, and he thinks the company will struggle to reach its target of 10 million iPhones sold by yearend. The economy is slowing, after all. And with a next-generation iPhone rumored for release this summer, some consumers may delay buying.

Perhaps Apple will need to cut prices to boost sales, a painful move if the percentage of unlocked iPhones continues to rise. A cheaper price tag and the loss of Apple's monthly take from carriers would bring the iPhone's lofty profit margins closer to earth.

The best resolution for Apple may be to pick up the pace of its overseas expansion. That would give unlocked iPhone owners an opportunity to sign up with the company's chosen wireless partners. And it would help Apple tap into all those other potential customers who haven't wanted to deal with the hassles of unlocking a phone. Indeed, some experts expect the company to announce more carrier deals by the Mobile World Congress 2008 conference in Barcelona in mid-February.

Kharif is a senior writer for BusinessWeek.com in Portland, Ore. Burrows is a senior writer for BusinessWeek, based in Silicon Valley .