iPhone gray market swells to 800k phones

Comprising an estimated 1 million total units, the iPhone gray market has become a major force in the worldwide mobile phone sales community, stretching from China to Prague to South America. Claiming confirmation of the fact that 800,000 to 1 million iPhones, or about one-fourth of the total sold, have been sold as "unlocked" devices in countries outside Apple's official carrier domain, BusinessWeek profiles some of the more aggressive gray market peddlers who have made a killing on selling the device for unauthorized wireless service providers.

Propelling the flood of unlocked devices is "TurboSIM" -- a hardware modification in the form of a replacement SIM card that allows the iPhone to link with unauthorized carriers. The manufacturer of the TurboSIM card is Pavel Zaboj, who runs a ten person outfit calld "Bladox" in Prague, Czech Republic. Zaboj wasn't prepared for the overwhelming interest in his product. "We just sat their open-mouthed," he says.

TurboSIM solutions work by fooling the iPhone into thinking it is using an actual AT&T SIM card (shipment and pricing information was unavailable). Non-AT&T SIM cards still work with third-party phones when removed from iPhones, and turbosim is easy to install in just a few steps. The tiny circuit does not damage the iPhone in any way.

Bladox has reportedly sold its unlock mechanism in roughly 100 countries, including French Polynesia and Afghanistan.

Meanwhile, iPhone unlockers are using some shady tactics to acquire the iPhones necessary for resale. Apple restricts the number of iPhones that can be bought by an individual in order to curb such gray market activity. BusinessWeek reports that one reseller "got a friend to print business cards and pose as a small business owner so as to dupe an Apple Store manager into letting him buy 100 iPhones." Other reports indicate that resellers are getting their iPhone stock directly from the source -- Chinese factories that manufacture the device. '

The greatest threat to these resellers may not, ironically, be Apple. Instead, the availability of free, open-source software solutions could render the demand for hardware unlock solutions nil. Recently, an iPhone hacker discovered a new way to unlock Apple's iPhone firmware version 1.1.2 without the need to downgrade to a prior firmware revision and then re-upgrade after unlocking the device. The unlock technique relies on a bug that allows hackers to erase the contents of memory within a range of specific addresses, coupled with a second bug that allows users to copy data

Under the terms of a five-year exclusivity contract, Apple earns a portion of the revenue for each iPhone on AT if the former reaches its target of 10 million iPhones by the end of 2008, and 30 percent do not attach to AT&T, revenue could fall $500 million below expectations, with a corresponding earnings-per-share drop of 37 cents.