Apple Claims Billion Dollar Loss From 'Smuggled' iPhones

The great missing iPhone mystery may have been solved. Bosses at Apple were confused that they'd sold 3.7 million phones in the United States and Europe, but only 2.3 million were actually registered on the phone networks which had signed deals to provide service for the iPhones.

It turns out around 400,000 phones are registered with China Mobile, the country's leading cell phone carrier. The iPhone isn't sold in Asia, so it appears there's a rather ironic pattern by which the phones are manufactured in China, shipped to the US, and then unofficially imported back to China.

Apple had previously held discussions with China Mobile about supplying the phone officially, but did not reach a deal.

It seems Chinese techies have not only unlocked the phone (adapted it so it will work with any cell phone carrier), they've also created a Chinese language version of the software. (Source: efluxmedia.com)

Given the gap between phone sales and service subscriptions, it seems likely that similar 'smuggling' is going on in countries such as India and Russia. It's thought it could cost Apple a billion dollars in lost revenue over the next three years. That's because they take a cut from service subscriptions to licensed carriers.

The retail price for the iPhone is set lower than it might otherwise be because Apple's business model assumes they'll get as much as $120 a year for each customer in commission. Not receiving this money on more than a third of sales obviously hits their bottom line significantly.

There's a clear incentive for people to 'smuggle' the phones. They are currently fetching between $450 and $600 in China, compared with a $400 retail price in the US. It's believed the phones are often taken back to China by tour groups or air hostesses. Though Apple's purchase agreement forbids unlocking the phone, it doesn't appear to break any Chinese laws, though the large-scale smugglers may be evading import duties. (Source: nytimes.com)

There's clearly an ethical debate to be had, but in practical terms Apple's business plan for the iPhone seems to have backfired. Hundreds of thousands of people around the world are clearly willing to pay for an iPhone, so it might as well have been Apple that sold them, particularly given the bizarre situation of Chinese workers making the phones but not being allowed to buy them.

Clearly, Apple feels it has to control the distribution of the phones so that they can sign deals with cell phone service carriers. However, the Chinese market suggests it might be more profitable to simply sell the phones at a higher price without any restrictions.