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AP
New iPhone's business model is tough on unlockers
Tuesday June 10, 5:22 pm ET
By Peter Svensson, AP Technology Writer
In-store activations for new iPhone's makes life hard for unlockers

NEW YORK (AP) -- The new iPhone and the way it will be sold look set to shut down a small industry that arose to make the first version of the iconic phone available around the world.

The original iPhone, which launched in June last year, was initially available only in the U.S. 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 U.S., 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 $500 and another unlock it using software downloaded from the Internet.

Apple announced a new iPhone Monday for use on 3G, or third-generation, 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 U.S. for the first phone, but the second one will go on sale in 22 countries 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 the unusual arrangement under which the iPhone was being sold. Customers could buy them from a carrier or from Apple without activating them on a service plan, and that meant customers could go home and 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 Argentine, who owns a bar in Mexico City. He bought his iPhone in New York.

The new phone will be subsidized by carriers, which accounts for its lower price: $199 for the 8-gigabyte model, down from $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 likely will require two-year service contracts from everyone who buys the phone. AT&T said buyers will have to activate service before leaving the store with an 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. After being warned away by AT&T's lawyers, it doesn't help unlock iPhones. Unlocking software is available free online.

Apple tried to secure the device technically with its software updates, but couldn't. It's the requirement that buyers of the new phone sign up for service in the store that will be hard to get around, McLaughlin said.

Freeit4less, a company based in Syracuse, Utah, has posted prices on its Web site for unlocked 3G phones at $100 above store prices, but chief executive Kyle Jourdan said the company is not accepting any pre-orders given uncertainty surrounding the activation requirement.

"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.

Federal law allows consumers to unlock their own phones. But selling someone the means to unlock a phone and unlock another person's phone may be illegal. At least one U.S. 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 a $175 early termination fee plus the $36 activation fee. That would bring the cost of the new iPhone to $411 for an unlocker, just slightly more than the old model's $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. Analysts estimate AT&T plans to subsidize the phones by more than $200 each.

But Ralph de la Vega, head of AT&T Mobility, said Monday that it and Apple are working on "penalties" for users who buy phones and don't activate them within 30 days. AT&T could, for instance, bar buyers who repeatedly buy iPhones and break the contracts from buying more.

One major incentive for unlocking remains, especially for Europeans. Those who travel to other countries with unlocked phones can use local prepaid service plans rather than paying exorbitant international roaming fees to their home carriers.

Uniquephones.com helps unlock 10,000 British cell phones of all kinds every day, McLaughlin said, with travelers being a core customer group.

Associated Press Writer Alexandra Olson in Mexico City contributed to this report.

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