iPhone 2.0 Takes on the World

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Unlocked iPhones have been spotted in nearly every country in the world, according to research firm Net Applications, which tracks data from Web servers around the world. While hard numbers of unlocked iPhones are hard to come by—Apple Chief Operating Officer Tim Cook once characterized the number as "significant"—estimates suggest that gray market dealers in China may have sold as many as half a million iPhones there.

More Flexibility with Carriers

There's more reason for confidence in Apple's ability to infiltrate new markets. The company has shown itself willing to break with established practice of signing up only one wireless carrier per country, as it did in the U.S. with AT&T (T), with O2 in Britain, France Telecom's Orange in France, and Deutsche Telekom (DT) in Germany.

In some cases, Apple has inked agreements with two carriers in a country. In Italy, both Telecom Italia and Vodafone (VOD) carry the iPhone, while in Egypt it will also have two carriers, Vodafone and Orange. In Switzerland, consumers will be able to choose between iPhone plans from Orange and Swisscom. Moreover, many newly signed carriers won't have the iPhone exclusively. "We believe Apple's recently announced carrier agreements are not exclusive," wrote Piper Jaffray (PJC) analyst Gene Munster in a May 23 research note.

Apple is also showing itself more flexible on revenue sharing with the wireless carriers it chooses. In exchange for exclusivity, Apple has taken a cut of the revenue that wireless operators collect for voice and data services each month, something few if any other phone makers get. Apple has never disclosed the terms of these arrangements, but estimates put Apple's share of service revenues as high as 40%.

The problem is, consumers often don't want to use Apple's chosen carrier partner, and resort to "unlocking" the phone so it can work on the networks of other carriers, thus costing Apple its share of service revenue. Apple has lately been willing to take a smaller share in order to penetrate international markets, Mawston says. That's making some carriers look smart for having waited a year before taking the iPhone. Case in point: Vodafone. Having come under fire for first turning down the iPhone when Apple offered it on an exclusive basis in 2007, on May 6 Vodafone announced rollout plans for 10 countries including India, Turkey, South Africa, and Australia. "It's unlikely we'll ever know the commercial terms of Apple's agreement," says Ben Wood of CCS Insight, a British wireless consultancy. "But I bet Vodafone's getting a much better deal than it was offered 12 months ago." A Vodafone spokesperson said Apple will not permit it to comment on the deal.

China Toehold

Phone exclusivity will in time have to give way to multicarrier agreements all over the world if Apple is to boost its sales volume, Strategy Analytics' Mawston says. As Apple looks for ways to keep sales growing, it will also eventually have to embrace prepaid subscriptions. "The vast majority of the world is prepaid, and if Apple wants to be a mass-market player with the iPhone it will have to be in the prepaid market," he says.

Flexibility may be key to penetrating the world's largest cellular market, China. Apple is expected to open its first Chinese retail store in Beijing this year in time for the Olympics, though it has yet to land a carrier deal with China Mobile, which boasts a 400-million-strong subscriber base, the world's largest. "China Mobile is the Big Kahuna," says Needham & Co. analyst Charles Wolf.

Talks between Apple and China Mobile collapsed in January over Apple's share of service revenue. Mawston says China Mobile, and others like Japan's flagship carrier, NTT DoCoMo (DCM), are accustomed to sharing less than 10% of their service revenue with handset makers. "For Apple to have come in demanding 30% or more is just a nonstarter," he says.

Apple could get a leg up in negotiations from a recent move by China's government to make the country's market more competitive. Once Apple gets a toehold in China, there's no stopping the iPhone engine. "We think the iPhone is an open-ended growth story," Shaw Wu of American Technology Research in San Francisco wrote in a June 5 research note. "We envision iPhone one day becoming as big as the current Mac business."

Hesseldahl is a reporter for BusinessWeek.com. Schenker is a BusinessWeek correspondent in Paris.