The iPhone Gray Market

Gray market is where branded original products are diverted from authorized distribution channels and distributed through other channels. I will examine the dynamics of the iPhone gray market and its effects on Apple.

Reasons for the gray market:
1. Apple's marketing team for the iPhone, did an excellent job in promoting the iPhone prior to launch. Rather than making it available widely to the journalists to try out, they controlled its exposure prior to launch in the typical Apple secretive approach to new product announcements. Significant consumer interest was generated prior to launch of the iPhone. The iPhone sold out of most stores within 4 days.

2. The iPhone was first released in the United States on June 29th 2007. Subsequently, Apple released the iPhone in other countries in a phased manner. Apple has not yet released the iPhone worldwide.

3. The Apple iPhone was launched exclusively on AT&T Wireless networks. AT&T holds exclusive distribution rights to the iPhone for 5 years. That meant that users with existing cell phones on non AT&T networks had to switch to AT&T if they wanted to use an iPhone. In 2007, Verizon Wireless led the US wireless data market share, with 17% followed by AT&T at 16%. AT&T was not the wireless carrier of choice for many consumers who would want to use an iPhone.

In summary very high demand, limited or no availability in specific geographic regions and unnattractive bundling of the iPhone with AT&T wireless were the primary reasons for the growth of the iPhone gray market.

The iPhone gray market:
There are two areas where the iPhone gray market has thrived. One is the selling of iPhones at a premium on online auction sites and the other is the unlocking of the iPhone. The unlocking has also resulted in an explosion of demand for the iPhone globally, enabling gray markets in countries where it has not been officially launched. The unlocking of the iPhone is possible through software or hardware hacks. While the initial hacks were difficult to implement for all but the most tech savvy users, they have increasingly become simpler.

Why doesn't Apple do anything?
The primary reason is that it simply cant do much to stop the gray market forces. Apple does release software updates that render hacks useless, however the hackers soon find new ways to hack the iPhone. It also voids the warranty of the iPhone if it has been hacked, but it is trivial to reset an iPhone that has been hacked through software so that the hack is undetectable. Also, hacking the iPhone is not illegal. Hence Apple or At&t really does not have any legal recourse to go after the hackers. Another possible reason is that Apple isn't really losing out too much due to the gray market. The real loser is At&t which definitely had to pay a premium to Apple for exclusivity. While Apple does make some money whenever an iPhone user starts a new contract with At&t, it is not much compared to the profit made by Apple on selling the iPhone itself.


Sources:
http://www.businessweek.com/technology/content/feb2008/tc20080211_152894_page_2.htm
http://www.newsfactor.com/story.xhtml?story_id=0320000140IO