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Unlocking the new iPhone won¿t be worth the trouble

UPDATE 7/2: For those just finding this post, you might be interested in reading my thoughts on how AT&T's plans to sell the new iPhone without a contract will affect the unlocking equation.

UPDATE 1/2/09: Amazingly, this old post still gets hundreds of hits a day. For those seeking the holy grail of an unlocked iPhone 3G,check out this PC World article on the "yellowsn0w" utility.

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Sellers of unlocked iPhones are about to go out of business.

The revised terms of Apple's agreement with carrier AT&T will make buying an iPhone with the intent of unlocking virtually impossible.

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Those who buy the iPhone 3G will need to purchase a service contract with AT&T before leaving the store. Apple will not allow customers to buy an iPhone online. And those who do not activate their iPhone within 30 days will face an as-yet-unspecified penalty.

After hackers cracked the iPhone last summer, unlocked iPhones became an industry unto itself. Some domestic customers unlocked iPhones for use on T-Mobile's network (the only other domestic network compatible with the iPhone).

But many more iPhones became part of a substantial international grey market. People bought iPhones online without purchasing a contract with AT&T, unlocking them and shipping them outside the United States for sale to eager customers in dozens of countries.

In September Apple tried to stop the unlocking with a software update that "bricked" unlocked iPhones, resulting in a backlash from irate customers and negative media coverage. The incident bruised Apple's customer-friendly public image and probably left CEO Steve Jobs seeking better options.

Not long after that ugliness it became apparent most of the phones were going to countries in which Apple had no deals with carriers, generating sales the company wouldn't otherwise have had. Apple policy quietly shifted to unofficial toleration of unlocked iPhones.

Until this week, anyway.

Now Apple has contracts with carriers in over 70 countries, all of which are preparing to sell the new iPhone 3G. A large and active grey market in unlocked iPhones no longer serves Apple's interests. Apple needed to make it go away, and quickly.

Apple's bricking strategy apparently has yielded to a method much harder to defeat: the terms of the AT&T service contract.

Simply canceling the contract with AT&T after the iPhone purchase would seem a workable tactic. Adding the lower cost of the new iPhone ($199) to the $175 fee for canceling the contract and the initial $40 activation fee brings you to a total of $415, just $16 more than buying the original iPhone without a contract.

But according to a Computerworld article, AT&T will require the return of the iPhone before it cancels the contract.

So if you really want to own an unlocked iPhone, you'll face no insurmountable technical barrier. But since you'll be paying full freight for AT&T's service, you'll have gained little.

As an advocate for Apple selling unlocked iPhones for a premium price alongside carrier-subsidized locked iPhones, I'm disappointed Apple decided to choose this path. I understand the strategy behind it, though.

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To sell much higher numbers of iPhones, Apple knew it needed to drop the price. The only way Apple could sell the iPhone for significantly less money was to have AT&T subsidize it. You can bet AT&T insisted on the airtight restrictions in the contract terms to ensure it would get the monthly fees needed to cover that subsidy.

Apple will sell more iPhones, AT&T will make more money and customers will pay more while losing what little hope remained of someday being able to use a carrier of their choosing.

And while on the subject of pricing, the long-term cost of the iPhone 3G will exceed the original's since the minimum service fees with AT&T will run at least $10 per month higher.

With a two-year contract, that's $240 -- $40 more that the $200 price cut you'll get with the new subsidized iPhone. If AT&T charges more for text messaging as some suspect (monthly fees start at $5), the discrepancy could be more severe.

Furthermore, AT&T is the one reaping all the extra dough, not Apple. Another part of the companies' new agreement ends the revenue sharing of the monthly contract fees. (Apple will continue to collect fees from existing iPhone contracts, however.)

So not only will AT&T collect more from each customer every month, it gets to keep all that money for itself.

It appears the revolution the iPhone supposedly had brought to the phone maker-carrier relationship has crumbled prematurely.

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