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Apple Minus AT&T Equals Lots of iPhones Somewhere Else

By Chris Maxcer MacNewsWorld ECT News Network
Jan 25, 2008 12:09 PM PT

The latest iPhone controversy comes courtesy of a grade-school math problem: If Apple reports that 4 million iPhones have been sold, and AT&T reports that 2 million iPhones have been activated with AT&T accounts, and current estimates peg iPhone sales in the UK, Germany, and France in the neighborhood of 350,000 to 400,000, and if 20 percent of all iPhones sold are hacked and unlocked, how many iPhones are left unaccounted for?

Apple Minus AT&T Equals Lots of iPhones Somewhere Else

After doing the math, Toni Sacconaghi, a financial analyst for Sanford Bernstein, reportedly thinks there's 670,000 iPhones that are unaccounted for, and that may mean that Apple is experiencing softening iPhone demand.

Sacconaghi was unavailable for comment at press time.

A Closer Look

At Macworld last week, Apple CEO Steve Jobs said Apple had sold 4 million iPhones to date. Since that includes a couple of weeks in January, the 4 million figure doesn't quite match up with the numbers AT&T reported for its most recent financial quarter. Using information from both companies' financial reports, here's how the math breaks down:

Apple sold 2.315 million iPhones in its most recent quarter while AT&T's report indicates it activated about 900,000 iPhones in the fourth quarter, which is a difference of 1.4 million or so iPhones. Subtract the 350,000 to 400,000 or so iPhones reported sold in Europe, and that leaves approximately 1 million iPhones that Apple says have been sold but remain under the radar.

Previous to this quarter, of the first 1.1 million iPhones sold, Apple said it believed that 250,000 of them -- nearly 18 percent -- were purchased and then hacked to run on other phone carriers. Apple has declined to continue estimating the number of phones that are hacked and subsequently unlocked -- a customer-driven action that bypasses the exclusivity agreements Apple has been forging ties with carriers like AT&T in the U.S. and O2, T-Mobile and Orange in Europe.

For Apple, a sold iPhone is a sold iPhone, while each hacked iPhone is a missed opportunity for an official iPhone carrier. If 20 percent of the unaccounted for iPhones were hacked and unlocked, that still leaves 800,000 iPhones.

Sacconaghi reportedly uses sales figures for the entire 2007 year in his calculation to get the 670,000 number.

Either way it's calculated, there are still hundreds of thousands of iPhones that are seemingly unaccounted for.

Some Explanations

First, in AT&T's conference call with investors, AT&T actually addressed a question that gets at the perceived discrepancies without definitively nailing down each iPhone, which may be impossible. AT&T said there are devices that AT&T has purchased that are in inventory; there are devices that have been sold and shipped but haven't been activated yet; and there are some devices that are being purchased through channels in the U.S. or purchased through online channels that are actually going to international markets.

AT&T's answer means that the company actually buys the iPhones from Apple, which lets Apple credit the sale before AT&T. What's a reasonable number? That's hard to say, since companies like AT&T also sometimes use so-called middlemen distributors for mobile devices. However, it's safe to say that a good number of iPhones are in AT&T's channel somewhere. Plus, it's possible that more customers are buying direct from Apple vs. from AT&T, which indicates a customer preference to initiate the sale through Apple -- and that might mean AT&T has gobbled up more iPhones than it thought it could sell through its own stores.

The notion that iPhones have been given as holiday gifts brings up two points. First, the owners may be waiting for service contracts with other carriers to expire before activating the iPhones. Secondly, these owners may be more likely to attempt to hack and unlock their iPhone and use it with their existing carrier until their service contracts run out -- or forever. These buyers may not see a tricky software hack as a $400 risk since they didn't actually pay for the phone themselves.

The Rest of the World

The iPhone is only being sold officially with service contracts in the U.S and a few countries in Europe. That leaves an awful lot of people in a lot of other places who might be able to get their hands on an iPhone and unlock it. That's not to say iPhones couldn't be smuggled into countries in large numbers -- why did Apple create a two-iPhone limit on sales over the holiday season? Not because a family of four wanted to buy one for each person.

Perhaps the 20 percent hacked and unlocked assumption is way too low. A simple Google search with the terms "unlocked iPhone" results in a half-dozen ways to get an unlocked iPhone, and that's just in the first page of search results. Obviously, due to Apple's agreements with service providers, this isn't something the company wants to brag about.

The Last Option: Something's Fishy

It is possible that someone is lying or overstating their numbers for the benefit of public perception. In this case, it seems unlikely for AT&T simply because the numbers are far under what Apple has first reported. The larger the discrepancy, the more likely it appears that customers are bypassing AT&T altogether. That's not a point public relations people like to make.

As for Apple, the company certainly wants to be given investors' money and make the world love Apple products. Also, don't forget the company's stated goal of selling 10 million iPhones by the end of this year. Might Apple be fudging any numbers?

"Generally speaking, it's a balance," Charles Golvin, an analyst for Forrester, told MacNewsWorld. "On the one hand, yes, for news and public perception, numbers inflation is the more likely direction ... but on the other hand, with Sarbanes-Oxley and all the other [compliance and financial reporting] scrutiny, there is a countervailing force on the part of financial teams to err on the side of caution."

So, while Steve jobs can point to market percentages in his keynote address at Macworld that cites, for example, positive "smartphone" market penetration reports created by other companies, the numbers that come out of today's official financial reports are probably accurate.

If that's the case, long live the unlocked iPhone.

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