Apple (AAPL) iPhones Secreted Into China Could Cost Company $1 Billion

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Apple (NYSE: AAPL) iPhones, perhaps hundreds of thousands of them, are finding their way into China. There they are "unlocked" so that they can work on local cellular networks. According to The New York Times "For months, tourists, small entrepreneurs and smugglers of electronic goods have been buying iPhones in the United States and then shipping them overseas."

There is every reason to think that the same thing in happening in countries like India and Russia.

While that people moving the phones overseas may buy them in the US, a transaction which makes Apple money, the company does not get a part of the mobile contract for the cellular service which runs these phones. Apple has carefully set up a business model in the US, with AT&T (T), and Europe, so that the company gets a piece of what customers pay to carriers for voice and data.

Some analysts believe that the "unlocked" iPhones could cost Apple as much as $1 billion over the next three years. For a company which has annual operating income run rate of about $7 billion, the number is not insignificant.

Apple may have a partial solution to the problem. It could bring out new versions of the phone which are more difficult to tamper with or it could increase the frequency of software upgrades in the hopes of making the older phones less attractive.

But, no matter what it does, Apple’s program for taking a piece of its carriers’ revenues is already at least partially broken.

Douglas A. McIntyre