Unlocked iPhones - Not All Bad for Apple

Implications: Unlocked iPhones, which can represent $200-$300+ dollars per device in lost revenue over the course of two years, are not all negative for Apple.

Analysis: By several accounts, there could be 700,000 or more unaccounted for iPhones, many of which may be unlocked and in use.  While this is a large number of devices that represents a significant lost recurring revenue stream, the increased device sales delivers some benefits to Apple.  

First, from all reports of purchasing and unlocking activities, many of the unlocked iPhones are going to countries where the iPhone is not sold.  This is demand that Apple would not have met.  Second, Apple is getting the benefit of PR and hype from these activities.  The more stories about the iPhone being unlocked and used in countries where the device is not even sold, the more the iPhone legend, and appeal, grows.  Third, more volume means better pricing and more favorable terms with its suppliers.  Even though Apple may be forgoing the data revenue stream, Foxconn / Hon Hai, the iPhone’s manufacturer, is producing more units and therefore unit cost should go down (ceteris paribus).  Finally, as Apple is selling these devices at a robust 50% margin, they are still making a hefty profit, well above the industry average of mid-teens or even the roughly 20% for market leader Nokia.  

Apple must have anticipated that this unlocking frenzy would happen.  After all, unlocking phones is a practice that has gone on in GSM markets for well over a decade.  Apple expected a certain portion of its handsets to be unlocked and appear on the black market - maybe not this high a percentage perhaps.  In the short run, as long as the unlocking phenomenon does not affect Apple’s ability to sigh exclusive deals with robust revenue sharing, they can live with it.  If, however, Apple’s deal structure becomes less favorable, iPhones will become increasingly harder to unlock, and Apple may have to revisit their iPhone business model.