Apple coming to terms with iPhone 'unlocking,' says analyst

Company reasserts '08 sales goal of 10 million

Apple Inc.'s attitude about unlocked iPhones hints that the company will abandon its business model of grabbing a piece of mobile carriers' revenues in order to make its goal of selling 10 million smart phones this year, an analyst said today.

"They seemed absolutely blithe about making the 10 million number," said Ezra Gottheil, an analyst at Technology Business Research Inc., referring to comments made by Apple executives during yesterday's earnings conference call. "And I get the funny sense that ultimately the whole idea of locked iPhones and the revenue almost doesn't interest them."

Several times during the call, Peter Oppenheimer, Apple's chief operating officer, and Tim Cook, the company's chief financial officer, stood by the 10 million iPhone goal. "We are confident on hitting the 10 million for the year," Cook said.

According to the sales figures Apple released yesterday for the first three months of 2008 -- its second fiscal quarter -- the company sold 1.7 million iPhones worldwide, leaving 8.3 million more to go if it's to reach its iPhone sales goal.

"I think they think they'll go explosively into China" this year, said Gottheil, who stuck to earlier predictions that Apple will have to move into the massive Chinese market to sell 10 million handsets and that it will probably have to forget about revenue sharing to do that.

"They'll go into China, they'll go into India, they'll go into all the large wireless markets," said Gottheil, "probably with a lower price." But Apple likely won't use the same business model that it has used in the U.S. and Europe, he said. In each of those places, Apple has struck exclusive deals with one mobile carrier. In return, Apple receives part of each iPhone customer's monthly subscription.

China Mobile Ltd., that country's largest mobile service provider, has reportedly balked at any revenue sharing, a sticking point that has prevented negotiations between it and Apple from getting off the ground.

Financial analysts from several firms also pressed Oppenheimer and Cook to quantify the percentage of iPhones sold that have not been registered with one of the partner carriers, and thus presumably "unlocked," or hacked so that the devices can make calls with any mobile carrier.

In the one estimate given on unlocking, Cook said last October that about one in every six iPhones had been purchased with the intent to hack the hardware and use it with an unsanctioned carrier.

Yesterday, however, he refused to reveal what Apple thinks about unlocking trends, going only as far as calling the number "significant."

"We don't feel that we can quantify it with precision, and so we don't want to put out a number that we can't stand behind," Cook said. "But we've gone out of our way to classify the number as significant. I'm not sure how to be more clear than that."

Earlier in the call, in answering a question about recent shortages of iPhones in Apple's own retail stores, Cook blamed sales to buyers who planned to unlock the device. "Our U.S. stores have experienced more stock outs, or relatively more, and we believe the reason is that there are more phones being bought there with the intention of unlocking," he said.

The combination of Apple's refusal to estimate the extent of unlocking with Cook's matter-of-fact attitude caught Gottheil's attention, and fueled his speculation that Apple will do what it takes to sell 10 million iPhones this year, including ignoring unlocking and tossing out the revenue-sharing model where necessary. "Don't get me wrong, they want to make nice, solid profit, and Jobs would like to be the best-compensated CEO," said Gottheil. "Revenue from the carriers goes straight to the bottom line, they don't have to do a thing to get it.

"But what they mostly care about is disseminating Apple products."

Gottheil also said that the signs are clearer that Apple will launch a new model of the iPhone that accesses the faster 3G data network, even though Cook passed on a couple of opportunities during Wednesday's earnings call to comment on a 3G-enabled device.

Specifically, Gottheil noted that Oppenheimer confirmed that Apple is still planning to update the iPhone's firmware in "late June." Dubbed "iPhone 2.0," the update will let users add third-party applications to their smart phones. It's also expected, though not announced by Apple, that Version 2.0 will also support 3G.

"I'm betting late June [for 3G]," Gottheil said.


Copyright © 2008 IDG Communications, Inc.

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