iPhone Gray Market

There's no sign of Apple's iPhone among the thicket of cell phones, handset covers, and other accessories hung on shelves and inside the waist-high glass display case, but he'll be glad to show you one. In exchange for an up-front payment, "you can buy as many as you'd like," Li says. The assertion may seem misplaced in a country where Apple has yet to introduce the iPhone. The device is officially on sale only in the U.S., Britain, France, and Germany, where Apple has signed exclusive contracts with cellular carriers including AT&T. Yet Li's booming business is the very real byproduct of pent-up demand for a much-hyped device made by a company that places strict limits on where and how it's sold. BusinessWeek sources confirm analyst reports that 800,000 to 1 million iPhones, or about one-fourth of the total sold, are "unlocked"—that is, altered to be able to run on networks other than those of Apple's exclusive partnersThis iPhone aftermarket didn't take long to develop. By the time the device went on sale on June 29, 2007, software hackers and companies that specialize in unlocking cell phones were already searching for ways to make the iPhone work on nonsanctioned networks. Within weeks, online forums were buzzing with an answer that emanated from a tiny company based in Prague, Czech Republic. Pavel Zaboj is a 36-year-old former math student who together with friends developed an electronic device called Turbo SIM that was designed to turn cell phones into mobile payment systems. Turns out Turbo SIM could also be used to trick the iPhone into thinking it's operating on AT&T's network. By mid-August, Zaboj's 10-person firm, Bladox, was being flooded with orders, particularly from Canada and Mexico, where Apple addicts didn't have to venture far to get an iPhone. Bladox was totally unprepared, and couldn't fill the orders that rolled in. "We just sat their open-mouthed," Zaboj says. Bladox has sold devices used to unlock phones in roughly 100 countries, including French Polynesia and Afghanistan, Zaboj says. BusinessWeek readers report iPhone sales in Brazil, Canada, the Dominican Republic, Indonesia, Israel, Nigeria, Peru, Poland, Russia, and the United Arab Emirates. The boom is being fueled not just by short supply of a hot product, but also by scant evidence of interference from Apple or its partners. Apple-authorized partners—AT&T, O2, Orange, and Deutsche Telekom's (DT) T-Mobile—lose hundreds of dollars in monthly fees when subscribers forgo a two-year contract in favor of unlocking. But the bulk of the unlocking seems to be occurring in places where customers have no authorized carrier to choose from.