How Apple is killing the unlocked iPhone market

During Apple's introduction of the iPhone 3G, CEO Steve Jobs quipped that the company had debuted the iPhone in six countries, but knew the device was being used in "many more," drawing subdued laughter from his keynote audience. Jobs was referring to the massive, hitherto unstoppable market for iPhone unlocking -- a proces that allows the devices to be run on unauthorized wireless carriers. With the debut of the iPhone 3G, however, Apple is using multi-pronged leverage to sharply mitigate the utility of and access to unlocked devices from this point forward.

Apple's relationship with the unlocking community has been ambivalent. Unlockers cost Apple millions in subscription-derived revenue that the company shares with authorized carriers, but have also played a vital part in growing the iPhone market. Owners of unlocked, first-generation iPhones represented the epitome of early adoption -- 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 were, collectively, an international beacon of sorts, offering Apple market 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" first-generation iPhone brought Apple somewhere between $288 - $432 in monthly subscriber fees from the worldwide mobile carriers with which Apple partners.

The unlock market also proved lucrative for grey-market entrepreneurs who bought dozens of iPhones to resell as carrier-agnostic in international markets.

With the iPhone 3G, however, Apple has transitioned its partnership model to a more traditional format: wireless companies pay an up-front subsidy to Apple, allowing iPhones to be sold at a discounted rate, and eschew the monthly stipend, instead keeping the entire monthly subscriber yield to themselves.

This arrangement results in what is presumably a smaller profit for Apple on each iPhone (the company previously charged full price for each unit in addition to reaping the monthly stipend) and requires an up-front financial commitment from wireless carriers, but will also allow deeper market penetration because of the reduced price point. The iPhone 3G will start at $199, compared with $399 for the first-generation phone.

The new carrier model has also forced a different method of acquisition for customers, who must now activate iPhones at the time of purchase rather than at their leisure through iTunes as with the first-generation devices. This, in theory, means that would-be unlockers will have a much tougher time getting their hands on contract-free devices to unlock.

In the case of first-generation phones, Apple used a technical tack to thwart unlockers. Each successive firmware revision for the devices included revisions that undid or nullified extant unlock methods. The hacker community dutifully responded, however, in some cases unlocking new firmware revisions before Apple had a chance to release the updates to the general public. Eventually the unlock process was refined to a single-click mechanism that worked with all iPhone firmware revisions.

In the case of the iPhone 3G, the hurdles for unlockers are of a wholly different nature. In addition to the aforementioned contractual roadblock, unlockers face more serious foes: supply and demand. Apple plans to make the iPhone 3G available in over 70 countries in the next few months, largely eliminating the need for unlocked devices in those markets. While some users will undoubtedly still desire unlocked devices for their ability to utilize different carriers in different countries at reduced voice and data expense, the insatiable demand for contract-free phones will be no more.

There's another reason unlocked iPhone 3Gs will be prove less desirable, at least in the US. T-Mobile, which has seen a flood of unlocked, first-generation iPhones move to its network, uses a one-of-a-kind 3G spectrum that (upon initial analysis) will not be compatible with the iPhone 3G. That means an iPhone 3G might be able to work on T-Mobile's slower data networks but not take advantage of the faster data rates afforded by other carriers.

"It's a cat-and-mouse game," Jobs said last year, referring to the iPhone unlock market. "We try to stay ahead. People will try to break in, and it's our job to stop them breaking in."

It seems certain that hackers will immediately begin work on methods of overcoming the iPhone 3G's technical locking mechanisms. Apple's carefully orchestrated market pressure, however, may make their efforts for naught.