Apple

An unlocked iPhone 3G is a little closer to becoming reality, according to the iPhone Dev Team.

Gizmodo picked up on a video produced by the iPhone Dev Team demonstrating that it has gained access to the baseband processor used by Apple in the iPhone 3G. The baseband chip is what controls the connection between the phone and the mobile phone network, meaning that a software download that could let you use your iPhone 3G on a carrier network other than the ones officially designated by Apple could be released soon.

I'm sure you remember the fuss about the original iPhone and those who sought to unlock it from the four carriers that were Apple's launch partners for the first iPhone. The iPhone 3G has proven a tougher nut to crack, because Apple apparently changed the baseband to make it more difficult to exploit than the baseband used on the original iPhone. You can unlock your iPhone 3G to use it on another carrier by modifying the SIM card, but what the iPhone Dev Team is trying to accomplish is a software-based unlock that you would just download and install.

There hasn't been as much demand for unlocked iPhone 3Gs, given the much greater distribution of that phone around the world. However, there are still some countries, like China, that don't carry the iPhone, and there are still some users who want to use their iPhones on a different carrier than the one designated for the iPhone in their country.

AT&T plans to sell the 3G iPhone for $199 when it arrives in AT&T's stores in June, according to a report, in a sign that Apple may have given up on locked iPhones.

Fortune is reporting that you'll be able to buy a $199 iPhone in AT&T's stores, and only in AT&T's stores, when the new model arrives around the one-year anniversary of the iPhone launch. The report says Apple will sell 8GB and 16GB versions of the new iPhone for $399 and $499 in its own retail stores.

This report, based on the word of a single anonymous source, raises no less than 28 zillion questions. My first thought is that if this is true, the only way Apple would go along with its partner's intention to dramatically undercut its pricing would be if Apple plans to sell unlocked iPhones in Apple stores.

Apple seems to have acquiesced to the demand for unlocked phones, embracing the development as a sign of strong iPhone demand on its last earnings conference call. It also has not updated the iPhone firmware since February, even though the hacking community broke that update almost instantaneously.

So, if Apple was ready to embrace the unlocked model, AT&T would need a way to keep people locked into two-year contracts. People would then be able to choose between more expensive, unlocked phones or cheaper, locked models. This would probably mean an end to the revenue-sharing agreement between the two companies, though, as it would obviously end the exclusivity arrangement.

However, the report says AT&T has figured out some way to lock the phone directly to its service. How? If Apple can't do that, how is a carrier going to do it?

That brings up another possibility, that more than one iPhone is in the works for June. We've seen conflicting reports about whether the new iPhone would be slightly thicker or slightly thinner than the current model, and having two iPhones out in the wild would help explain those reports.

Presumably, AT&T's might come with the glossy black plastic chassis reported by Engadget with some sort of changes to the hardware (perhaps making it thicker) and software to close the loopholes exploited by iPhone hackers. While Apple would continue to sell the traditional design as a slimmed-down unlocked phone, for the higher price. Or maybe Apple gets the black version, it doesn't really matter: having more than one variety of iPhone has been a persistent suspicion since the first one was introduced last year.

Fortune didn't exactly distinguish itself with its BlackBerry report from last week, so I'm not exactly sure what to make of this one. With two months to go, I'm sure this won't be the last unconfirmed iPhone report.

As many as 400,000 unlocked iPhones were running on China Mobile's cellular network at the end of last year, according to market research firm In-Stat.

Apple sold 3.7 million iPhones in 2007, and more than 10 percent of them are in China, In-Stat said, attributing that information to China Mobile. That helps explain part of the "iPhone gap" created by the difference between Apple's shipping totals for 2007 and the activations reported by its carrier partners in the U.S. and Europe.

Despite Apple's attempts to keep iPhone unlocking under wraps with new software and changes to the iPhone's bootloader, enterprising entrepreneurs are apparently giving the people what they want. This is a bit of an opportunity lost for Apple, since the company has signed lucrative revenue-sharing deals with its carrier partners that don't apply if an iPhone is unlocked from its respective network.

But, as In-Stat noted in a report, at least it shows people want the iPhone. The firm said Chinese consumers want smartphones with multimedia features and Web browsing, and the iPhone fills that need nicely. And they're willing to pay for it: 20 percent of smartphones sold in China last year went for 4,000RMB ($533) or more.

Apple had at one point discussed the iPhone with China Mobile, but Apple CEO Steve Jobs downplayed the significance of those talks, saying the companies just had a single meeting. The iPhone is set to make its official debut in Asia at some point in 2008, probably sooner rather than later, but it's clearly a hot item in China already.

There's no doubt that Apple has taken iPhone unlocking very seriously in the first six months of its life on the planet. Even so, it appears despite significant roadblocks, the unlockers are winning.

Each of the three times Apple and AT&T have reported their iPhone numbers since July, there has been a gap between the number of iPhones sold by Apple and the number of iPhones activated for AT&T's network. During the first weekend of iPhone sales, the gap was 124,000 units. At the end of the third quarter of the calendar year, it had grown to 300,000 iPhones. And last week, Apple and AT&T revealed that gap had increased five times over in the fourth quarter, to 1.7 million units.

There's one easy explanation this time around for part of the gap: The fourth quarter marked the first time the iPhone was available through other carriers, namely Europe's O2, Orange, and T-Mobile. Still, that accounts for only 350,000 iPhones, according to various estimates, leaving 1.35 million missing iPhones to explain.

Some analysts think around 1 million of those iPhones have been purchased with the intention of unlocking them to run on other cell networks. If those numbers are true, that means iPhone unlocking exploded in the fourth quarter despite two steps taken by Apple to reduce the number of iPhones bought with unlocking in mind.

Last week Toni Sacconaghi of Sanford C. Bernstein thought a demand issue was to blame, believing that unlocking couldn't be much more widespread than Apple Chief Operating Officer Tim Cook had estimated back in October, somewhere around 20 percent of all iPhones sold. That would mean AT&T stores were starting to pile up an inventory of unsold iPhones.

But his fellow analysts jumped all over that presumption on Friday and Monday, declaring that unlocking is a much more prevalent practice than it seems, which would mean iPhone inventory is within normal levels. Mike Abramsky of RBC Capital Markets estimated that unlocked iPhones account for as many as 30 percent of all iPhones sold in the world last year, and Sacconaghi later upped his estimate to 27 percent, or sales of 1 million unlocked iPhones in 2007.

So how has Apple tried to curb unlocking? First of all, it imposed limits on the number of iPhones that could be sold per person to two units in late October, and required that buyers use a credit card. This was done to discourage unauthorized resale of the iPhone, especially among resellers who purchased iPhones for resale in countries that use GSM networks but where Apple has yet to launch.

More important, as Apple got ready for the launch of the iPhone in the U.K. and Germany in early November, the company changed the way the iPhone loads software from flash memory to only permit only certain kinds of software from loading into the main memory. This is called the bootloader, and moving to a new version of the bootloader automatically caused problems for the iPhone unlocking community.

Up until that point, it had been relatively easy to unlock the iPhone by just downloading software and buying new SIM cards from any number of different outlets. But the release of those new iPhones created a roadblock for the hacking community that it still hasn't managed to solve through software. iPhones purchased prior to November 9 with older bootloaders can still be unlocked, even after they have upgraded to the 1.1.2 firmware that was released on the same day as the iPhones with the new version of the bootloader.

This was an extremely frustrating development for the unlockers, although work continues on finding a software fix. Post-November 9 iPhones can be unlocked using a couple of hardware methods that involve disassembling and tweaking the iPhone itself, or cutting away a little piece of your SIM card and taping it to another SIM card. As you might have guessed, those aren't exactly foolproof, and anyone who tries runs a serious risk of inflicting permanent damage.

But despite these hurdles, somehow many more iPhones were unlocked during the fourth quarter as were unlocked during the third, if the estimates are accurate. Analysts accepted Apple and AT&T's explanation for the gap during the initial weekend that a significant amount of iPhones were in transit as the weekend (and the quarter) came to a close on Saturday night, and the widespread activation problems experienced that weekend certainly could account for some of that gap.

But if only 250,000 to 300,000 iPhones were bought with the intention of unlocking during the third quarter, that means 700,000 to 750,000 were bought during the fourth quarter if the estimate of 1 million unlocked iPhones is correct, despite Apple's attempts to make life harder for the unlocking community. Put another way, overall iPhone sales doubled from the third quarter to the fourth, and iPhones destined for resale and/or unlocking almost tripled.

It's pretty easy to find an unlocked iPhone on eBay, and they are selling for between $450 and $700, well above the locked iPhone price of $399. And given these numbers, it's not hard to imagine finding plenty of unlocked iPhones in above-board and underground shops around the world.

Unlocked iPhones don't hurt Apple in the short term, as the company still gets the hardware revenue and the walking advertisement for Apple that is an iPhone user. It's the opportunity cost of the unlocked iPhone that really hurts Apple; the sweetheart deal it signed with AT&T entitles the company to a portion of the revenue taken in by AT&T for data use over its network.

And it will also make it harder for Apple to roll out the iPhone with exclusive carrier partners around the world. Apple is said to have a five-year exclusive deal with AT&T for iPhone distribution in the U.S., and if unlocking is rampant, AT&T's going to start wondering why they are giving Apple so much money on the revenue earned from locked phones when so many are going unlocked.

Would you pay more money just so you could have an unlocked iPhone?

T-Mobile is going to charge the equivalent of $1,478 for an unlocked iPhone in Germany, after deciding Wednesday to comply with a preliminary injunction issued by a court at the request of Vodafone, a rival carrier. The carrier will continue to challenge the court's decision, but it seems that locking phones to a specific carrier is against German law.

According to T-Mobile's Web site, "numerous functions remain exclusively available to T-Mobile customers with a Complete rate plan." The only feature that the company singles out as missing, however, is the visual voicemail. T-Mobile also says it has a more complete EDGE network than its rivals, but those looking to switch to Vodafone or other carriers may not care so long as they get data access in their city or town.

It will be interesting to see how much value people place on an unlocked iPhone. According to Reuters, a locked iPhone in Germany will cost you $2,330 over the life of a two-year contract: $1,740 for the service plan and $590 for the iPhone. T-Mobile said it will still offer that deal for iPhones locked to its network, and that the special iPhone rate plans are 40 percent cheaper than the "comparative use" of another data-enabled phone through T-Mobile.

To many, cell-phone unlocking is a matter of personal freedom, in that they bought a device and want to use it with whatever service provider they choose. After all, we aren't hooked to Comcast or AT&T's broadband networks for 24 months after we buy a new PC or Mac. But there's probably quite a few potential customers who don't care and just want to jump on the iPhone train for the cheapest possible fare.

One thing is probably certain: half the mobile phone resellers on the planet just booked flights to Germany. Unlocking iPhones wasn't too difficult a process before, but it did involve modifying software and was subject to retaliation from Apple in the form of software updates, such as the infamous OS X 1.1.1 update. A clean, straight-from-the-factory unlocked iPhone could command a higher price than one that had been jail broken and unlocked using the current methods.

Still, will it command upwards of $1,500 in order to make resale worth the effort? I have no idea, but there's no way in hell I'd pay even close to that much for a phone without 3G data networking or GPS just so I could run it outside of a particular carrier's network. And then I'd still have to pay some carrier how ever much a month, at least $50, to make it work. Even assuming that somebody offers me that cheap a data plan, I'd wind up paying $2,678 over two years, as compared with the $2,330 I'd pay over the life of T-Mobile's two-year contract.

That, of course, is probably not a coincidence. T-Mobile might have to offer an unlocked iPhone, but there's apparently no requirement as to how much they have to charge for it. And if Apple struck the same kind of revenue-sharing deal with Deutsche Telecom, T-Mobile's parent, as it did with AT&T, the companies have to come up with some way to make sure Apple gets its cut.

Apple and Orange (ha!) will also have to offer an unlocked iPhone for the French market to comply with that country's telecom laws. The phone will go on sale next week, and will command a "premium" price, according to the International Herald Tribune.. Now maybe we have some idea of just how much a premium, but will people be willing to pay?

The exact details of AT&T's revenue-sharing agreement with Apple have not been disclosed, but one analyst thinks that over the two-year life of a user contract, the amount exceeds the actual price of the iPhone.

Silicon Alley Insider spotted a research note from Piper Jaffray's Gene Munster estimating that Apple is receiving $18 per month for each iPhone subscriber, under the revenue-sharing agreement between the two companies. Apple has confirmed that such an agreement exists, but has not shared the details about exactly how much cash it's getting from the revenue AT&T makes on iPhone customers using the carrier's data network. In July, Munster estimated Apple was receiving just $3 per iPhone subscriber and $11 per iPhone customers new to AT&T, but he's rethought the numbers after Apple's latest earnings release.

Munster takes the 1.4 million iPhones that Apple has sold since the device made its debut, and subtracts the 250,000 iPhones that Apple said it believes were bought to unlock from AT&T's network, to calculate that there were 1.15 million revenue-generating iPhones in play during Apple's fourth quarter. He then uses the $118 million that Apple recorded in iPhone-related revenue during the quarter to estimate out how much service revenue Apple took in from its share of AT&T's data charges by subtracting his estimate of hardware revenue generated by the sale of each iPhone, based on the average selling price.

It's a little tricky because the iPhones that were sold in June and July have obviously been generating revenue for longer than the ones sold in September, but he arrives at a figure of $18 per iPhone subscriber in monthly payments to Apple during the fourth quarter.

That would mean that over the life of a two-year contract, AT&T will pay Apple $432 per iPhone subscriber. Silicon Alley Insider adds the $400 in revenue per iPhone and uses iSuppli's cost estimates to calculate a $565 profit per iPhone over a two-year period. I'm a little wary of those iSuppli numbers myself (they don't really account for things like research and development costs), but the exact number isn't really the point: Apple has a huge incentive to make sure iPhones stay on AT&T's network, even if Munster's numbers aren't perfect.

I sent Munster an e-mail with a few questions, including whether it's fair to assume that the $18 a month figure will remain constant over the two-year contract, but I haven't heard back yet. A reader of Tuesday's iPhone blog made a fair point that Apple still gets revenue from the sale of an unlocked iPhone. But it's leaving quite a bit of money on the table if that phone doesn't run on AT&T's network.

Throughout all the hoopla over the hacking of the iPhone, it was never very clear how many people were actually trying to escape from AT&T. Apple ventured a guess on Monday.

During a conference call to discuss the company's blowout fourth quarter, Apple Chief Operating Officer Tim Cook said that of the 1.4 million iPhones sold since June 29, 250,000 were bought with unlocking in mind.

"Where we don't know precisely how many people are doing that, our current guess is there were probably 250,000 of the 1.4 million that we sold where people had bought them with the intention of doing that," Cook said, or actually volunteered: no one asked him that specific question.

There are now several reports out that suggest the 250,000 is a firm number of unlocked iPhones in the wild, but that's not exactly what Cook said. An Apple representative said Tuesday that Cook's comments were just an estimate of unlocked iPhones, although it does appear to be a pretty damn good estimate.

AT&T had its own earnings conference call earlier Tuesday, and Bloomberg reported that the carrier said it has activated 1.1 million iPhones to date, which could suggest that as many as 300,000 iPhones might be destined for other cellular networks. Some of that difference can be chalked up to units in transit as the quarter ended on September 29, or iPhones that were bought at the very end of the quarter and activated at the very beginning of the next. Of course, it's also very possible to unlock an iPhone without going through the registration and activation process with both Apple and AT&T, disappearing off the radar screen.

As discussed at length, Apple is unlikely to stand idly by and let users unlock their iPhones. Peter Oppenheimer, the company's CFO, confirmed the obvious on Monday, that Apple doesn't receive any payments from AT&T under their revenue-sharing agreement for iPhones that aren't running on the AT&T network.

Many of the iPhones counted in Cook's estimate were sold after Apple cut the price of the device by $200, he said. So not only did Apple miss out on the higher profit on those iPhones, it's also losing the ongoing revenue from AT&T's data services. Now that several of the iPhone hacking groups have figured out a way around the 1.1.1 software update, which bricked many of the early unlocked phones, Apple likely has another software update waiting in the wings.

Free yourself from AT&T! The iPhone revolution is at hand! You'll no longer suffer the tyranny of forced cell phone use for at least another, uh, couple of weeks!

Through the magic of technology, it's now possible to unlock an iPhone from AT&T's network through a software download developed by iPhoneSimFree.com. Engadget and Gizmodo tested out the process, and it does appear that the software will let you use the iPhone on any GSM network either inside the U.S. or overseas.

It's not the first piece of iPhone unlocking technology. After the iPhone Dev Team figured out how to install applications on the iPhone, a few other hacks have arrived including TurboSim, Uniquephones, and that 17-year-old kid from New Jersey who came up with an unlock that involves much soldering and most definitely voids the warranty.

But do you really want to pay money to unlock the iPhone? Apple intends to release software updates to the iPhone every so often to deliver new features or capabilities, and it doesn't seem that much of a stretch to assume Apple has purchased a copy of the software unlock in order to lock the iPhone again with the next software update. With so much riding on the iPhone, it still seems likely that Apple doesn't want to open up the iPhone to either application development or other networks until it feels more confident about the OS X iPhone software, which is really a 1.0 release of a new operating system.

Rest assured, there will be at least one more iPhone software update this year. And it's not likely that the unlocking software will work after that update arrives, as the folks at iPhoneSimFree.com make clear in several places. Also, the iPhone Dev Team coders, who are asking us not to link to their wiki and flood it with incoming traffic, are mounting a fund-raising campaign spearheaded by Gizmodo to help preserve nonprofit iPhone hacking and reverse-engineer the iPhoneSimFree.com software.

Update at 2:25 p.m.: Later in the day, another member of the iPhone Dev Team posted a message in their forums that the group would not be reverse-engineering the iPhoneSimFree.com software out of respect for that organization. But the group says that no one person speaks for the iPhone Dev Team, so it's hard to get a sense of the group's official position in this case.

So, I can't recommend that you spend a hundred bucks to unlock your iPhone, although I'm sure that advice will have zero effect. Just wait--at the rate AT&T and Apple are going in the early days of their star-crossed relationship, this thing might be officially unlocked quicker than you think.