SAN FRANCISCO (MarketWatch) -- With its long history in the computer business, Apple Inc. is no novice when it comes to hackers.

But even Apple AAPL, -0.75% seems to have been caught off-guard by the wave of consumers breaking into its latest gizmo, the iconic iPhone, in an effort to "unlock" the device from having to operate within the network of its exclusive telecom-service partners, which include AT&T in the U.S.

The trend has been a mixed blessing for Apple. On the one hand, the company is still selling plenty of the devices, which rank as the most expensive wireless phone on the market.

On the other hand, iPhones that go unlocked are used on unsanctioned networks, denying Apple the ongoing revenue stream it has worked hard to secure through exclusive deals with its carrier partnerships.

"The issues for Apple are that they just started in this business, they have exclusive deals with certain carriers and the iPhone is not available globally, yet," said Tina Teng, wireless communication analyst with iSuppli Corp., an electronics research firm based in El Segundo, Calif. "But they've created hype and demand everywhere and Apple has to deal with that."

Currently, the iPhone is only available for sale in the U.S., the U.K., France and Germany, where Apple has set up exclusive carrier relationships for each market.

But demand for the device is strong, and some consumers in other markets are apparently unwilling to wait. The issue came into focus last month after both Apple and AT&T T, -0.28% reported their quarterly results, which showed a large discrepancy between the 3.7 million units Apple said it had sold by the end of the December period and the 2 million iPhone account activations AT&T claimed it had processed in the same period.

The missing 1.7 million iPhones -- even when accounting for projected sales in Europe -- suggest that there are more than just a few random hackers sitting in their garages cracking open the devices just for the fun of it.

“ 'They've created hype and demand everywhere and Apple has to deal with that.' ” — Tina Teng, iSuppli Corp.

Impatient customers

Estimates of the number of unlocked iPhones on the market range between 400,000 and more than 1 million. There have been reports of the iPhone being used everywhere from Australia to India to China -- countries where the iPhone isn't officially on sale.

In addition, some customers in the U.S. may want the iPhone, but may also be unwilling to switch over to AT&T's network. Some early iPhone hackers altered the device to work with T-Mobile, another U.S. carrier that operates a network similar to AT&T's, but does not have a deal with Apple for the iPhone.

Such instances show the breadth of demand for one of the most-hyped technological products of the decade. That demand goes beyond the limits of Apple and its current network partners to completely control how the iPhone is distributed around the world.

And since the iPhone must be unlocked to work in those markets, the estimated numbers of unlocked iPhones is high enough that there are rising concerns about the implication for such unregistered phones on Apple's future revenue as the company tries to establish itself in the mobile phone market.

"The way the iPhone is being sold, there is a plan with each [network] operator for sharing revenue," said Shiv Bakhshi, director of mobile device research at IDC. "If you unlock the phone, you're going to go to a different carrier and that means that much less ongoing revenue for Apple."

In the U.S., iPhone subscribers are locked into a two-year contract when they activate their phones with AT&T. Apple doesn't divulge exact figures for how much it receives from AT&T or its other wireless partners for each iPhone subscriber, but analysts estimate the company takes in anywhere between $10 and $20 a month for every customer who uses the device.

Apple unclear on impact

For its part, Apple's tight-lipped about what impact unlocked iPhones could eventually have on the iPhone strategy, and the corporation's bottom line. An Apple spokeswoman wouldn't comment.

But Chief Operating Officer Tim Cook touched on the matter during a Jan. 22 conference call to discuss Apple's quarterly results. Cook said the number of unlocked iPhones "was significant in the quarter, but we're unsure how to reliably estimate the number."

Apple tries to make it as difficult as possible to unlock an iPhone.

The device comes with just two buttons, one to turn it on and another on the iPhone face that activates the screen. There's a SIM card that contains information that helps the phone connect to the AT&T network, and which can be ejected with the use of a paperclip or small pin.

But taking the SIM card out and replacing it with one from another wireless carrier doesn't immediately unlock the iPhone. To unlock it, a user needs to either break it open, being careful to avoid inflicting permanent damage, and then make changes to both the hardware and software inside the iPhone's casing.

A software kit can be used to override the links to AT&T's network in the U.S., O2 in the U.K., Orange in France and T-Mobile in Germany.

Finding such a software kit isn't difficult. A search on eBay for iPhones brings up several listings for SIM card kits that claim to make the iPhone capable of working on any GSM wireless network, with prices starting as low as $25. There are also actual iPhones for sale that the sellers have already been unlocked for use on any wireless network.

Blessing or a curse?

For Apple, unlocked iPhones are a double-edged sword. The company has set a goal of selling 10 million of the devices this year, and even if an iPhone ends up as unlocked, it still counts as a sale toward Apple's revenue targets.

However, while that initial $399 for every iPhone sold delivers a strong premium to Apple, it is the recurring revenue from iPhone subscribers which is considered just as important to Apple's future success with its mobile phone venture.

Analyst Toni Sacconaghi, of Bernstein Research, estimates that if there were already 1 million unlocked iPhones at the end of 2007, that would account for more than one-quarter of all the devices reported as sold by that time.

For every 1 million iPhones that go unlocked, Sacconaghi estimates that Apple misses out on between $300 million and $400 million in future sales and earnings, because the devices don't generate any ongoing payments from wireless carriers.

Apple has a stated sales goal of 10 million iPhones for 2008. Sacconaghi says that if 30% of those phones end up being unlocked, Apple's total sales and earnings would be lower by $500 million in each of the next two years.

He said Apple could cut the price on the iPhone in order to stimulate sales and attempt to counter some of the losses of recurring revenue. But such a move could result in profit margins on unlocked devices falling to levels that are unacceptable to the company, and lead to even more demand for unlocked iPhones around the world.

"This would make it even more difficult to extract revenue sharing from carriers," Sacconaghi said in a research note. "Exactly when revenue sharing becomes even more critical to the [iPhone's] economics."