Unlocked iPhones using unauthorized wireless service

Owners of Apple's iPhone may have unlocked an "astounding" 1 million handsets to run on unauthorized wireless networks, depriving the company of lucrative monthly fees, Sanford C. Bernstein & Co. said.

That estimate represents 27 percent of about 3.75 million iPhones sold last year, Toni Sacconaghi, the top-ranked computer analyst by Institutional Investor magazine, said Monday in a note. His previous estimate was 750,000 unlocked phones.

Apple gets an undisclosed cut of monthly service fees for the iPhone, which is typically sold with two-year contracts from wireless providers in the U.S. and Europe. For every 1 million unlocked iPhones, Apple loses $300 million to $400 million in future revenue and profit, and may also find it more difficult to sign deals with new carriers, Sacconaghi said.

AT&T, which is Apple's exclusive wireless partner in the U.S., said last week that about 2 million iPhones had been activated. If 315,000 iPhones were sold in Europe and 480,000 remain in store inventory, that leaves a "stunning" and "astounding" 1 million unaccounted for, Sacconaghi said.

Apple spokeswoman Natalie Kerris and AT&T spokesman Mark Siegel declined to comment.

Apple shares were unchanged at $130.01 in Monday trading. After more than doubling last year, the shares fell 19 percent last week on concern that consumer demand for devices such as the iPhone and Apple's iPod may decline this year.

To unlock a phone, users must modify the software within the device that ties it to wireless services authorized by Apple.

Unlocked iPhones generate 50 percent less revenue and as much as 75 percent less profit than those tethered to service contracts, Sacconaghi said. If 30 percent of the 10 million iPhones Chief Executive Officer Steve Jobs plans to sell this year are unlocked, Apple's earnings may be lower by about 37 cents a share in each of the next two years, Sacconaghi said.

Piper Jaffray analyst Gene Munster estimates that there are about 838,000 unlocked iPhones, or 25 percent of the total sold last year. That assumes 350,000 were sold in Europe and 512,000 remain in stock at stores, said Munster, who is based in Minneapolis. He recommends buying Apple shares.

Apple, which said in October that as many as 250,000 of the 1.39 million iPhones sold through September had been unlocked, has declined to update that number. Apple sold almost 2.32 million iPhones in the holiday quarter ended Dec. 29.

"The number of iPhones bought with the intention of unlocking was significant in the quarter, but we are unsure how to reliably estimate the number," Chief Operating Officer Timothy Cook told analysts Tuesday, when Apple reported first-quarter results. "We are unsure when all the recipients will activate."