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The IPhone’s Splendid Success in the Shadows

The iPhone 4S is being hailed as a success by pretty much everyone, including a veritable pile-on of analysts chiming in to anticipate a fourth-quarter rise in sales for the shiny new device. Apple (AAPL) is also making gains in a less visible area of smartphone sales: the world of gray-market devices with prepaid service.

A Mission Local story on Thursday describes this as a key iPhone growth area that doesn’t get much attention. It mentions H20, a small regional mobile virtual network operator (MVNO) that uses the 3G network of AT&T (T) and also offers monthly service at rates 50 percent below what the iPhone’s authorized carriers can promise—including cheap international calling, a winning deal for immigrant populations. H20 and others of its ilk are experiencing new customer sign-ups for contract-free, prepaid service at a remarkable rate. At one general wireless and computing store in San Francisco, sign-ups for the small carrier were exceeding 10 daily, according to a store clerk cited in the article.

Small carriers and MVNOs come with significant downsides: Service can be cut off if technology changes or if they lose their deals with carriers that rent tower access to them. Customer service can be atrocious. In at least the case with H20, there’s no way to send multimedia messages (image, voice, audio, or contacts). But with monthly charges running at half what you’d expect to pay a prime carrier for comparable services, it’s a trade-off many consumers appear willing to make.

A further benefit is being able to bring your own hardware. People can buy iPhones for much less than the going rate for unlocked devices on Apple’s site—used or through less-than-legal sources—and carriers such as H20 have no qualms about working with local shops that perform unlocking services to set them up. Those who pay a little more upfront for an unlocked iPhone save on cheaper monthly fees. Even on larger networks such as that of T-Mobile (DTE:GR), the practice of bringing unlocked iPhones to a network that can’t fully support them has a lot of appeal. Or so the company’s million users would suggest.

China’s Thriving Gray Market

In China, the gray market is huge for the iPhone and other Apple products. For instance, half the iPads sold there as of October derived from unauthorized sources, according to a report from Analysys International. The iPhone 4S also sparked a lot of gray-market demand. When it went on sale in Hong Kong, stores were swamped with shoppers intending to resell the devices; the price in Chinese electronics markets soon after its launch in the U.S. was around $2,000.

Getting its iPhone into the hands of as many customers as possible is good business for Apple, even if it doesn’t necessarily flow via legitimate channels. When users leap aboard the iPhone express by any means, Apple gains potential customers for its media stores. The broader audience can also be influenced by Apple’s halo effect, which leads iOS device owners to buy Macs and other Apple products.

Apple doesn’t appear to be doing much to combat its gray-market success. If anything, the company has taken steps in recent years to encourage off-contract business by selling factory-unlocked devices directly through its own store. These are much easier to resell on EBay (EBAY) or in other second-hand markets, fueling opportunities for prepaid users. This and the continued availability of cheaper devices such as the iPhone 3GS stand to benefit Apple more in the long run than it would appear at first glance. They can stick around to encourage Apple’s prepaid growth, even after their original owners have tired of them.

Also from GigaOM:

Social Media Reactions to the iPhone 4S (subscription required)

Verizon Still Ironing the Bugs Out of LTE

Will 1B HTML5 Phones Change the Mobile App Economy?

Bill Gates Says Terrapower Is in Discussions With China

TV Shows Hit International Apple TVs, Emphasizing the iTunes Lead

Etherington is a professional blogger, writer, and editor.

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