Eight days after Apple’s new iPhone went on sale, an international team of programmers announced on Saturday that the device had been “pwned” — hacker jargon for “controlled” or “compromised.”

The loosely organized group, which calls itself the “iphone-dev team,” played an important role in the worldwide dissemination of the original iPhone, releasing a series of tools that allowed the device to run third-party software and to work in countries where Apple had not yet struck deals with local carriers. By February 2008, estimates of the number of unlocked iPhones in circulation around the world ranged from 800,000 to 1.5 million. (link)

But the value of the latest hack, dubbed Pwnage 2.0 and available for free download here, is not so clear.

For one thing, although it “jailbreaks” the new iPhone — meaning it allows it to use programs not authorized by Apple — it does not yet “unlock” it to run on unauthorized cellular networks.

Moreover, the very real needs that the iphone-dev team served in the first year of the iPhone’s release have largely dissipated.

Whereas there were almost no native third-party programs for the original iPhone, today there are hundreds available at Apple’s App Store, 25% of them free. (See here.)

And even if the iphone-dev team releases an unlock tool for the new iPhone — which it probably will soon enough — Apple (AAPL) and its partners have effectively shut down the black market for unlocked iPhone 3Gs by requiring that buyers either sign a long-term contract with a carrier or pay a prohibitively high price for the phone. The official price of an unlocked, pre-paid 16GB iPhone in Italy, for example, is 569 euros ($888).

The real value of the new tool — which can both jailbreak and unlock the original iPhone — may be for people who want to use the iPhone classic in countries with expensive calling and data plans (Canada and New Zealand come immediately to mind).

But there are risks to consider. Installing any unauthorized firmware on an iPhone voids the warranty and could “brick” the device. Even though the new jailbreak program has an easy-to-use interface and is supported by step-by-step instructions — with screen grabs — a high percentage of the user comments here and here are from iPhone owners who have run into serious problems.

Don’t be fooled by the friendly interface. Pwnage 2.0 is not for the faint of heart.

UPDATE: Erica Sadun, an iPhone developer and veteran jailbreaker, reports on TUAW that she has liberated her iPhone 3G with the new tool. “Without getting in details,” she writes, “I’d rate the new 2.0 Pwnage software as ‘for dedicated hackers only.’” (link)

Hats off to Silicon Alley Insider for their continued coverage of the overseas iPhone market.

Last week, Henry Blodget plucked a pseudonymous post from a New York Times comment stream and re-published what may be the smartest analysis to date of what’s driving the extraordinary demand for iPhones overseas, especially in emerging markets (see “Tantrum” here).

Today, Dan Frommer treats us to an informal survey of the going rate for those iPhones once they are unlocked and put up for sale. The results, grabbed from Craigslist or their local equivalents (Molotok, anyone?), are posted at right. For comparison, he notes, Apple (AAPL) sells the 8 GB iPhone for $399 in the U.S. and the 16 GB model for $499. (link)

UPDATE: It appears this whole thing was a hoax. This was posted Monday on a MacRumor forum:

Hey Guys,
It’s finally time I just come out and say it; I lied.

Tiny-Code never had any relations with Apple, Inc. or any other division of Apple. Never had the new firmware or any pre-SDK pack. Certainly never signed any NDA.

I find it interesting that a simple joke on the front of a minor at best Installer.app repo can cause so many wakes…

Sincerest Apologies,
KellyTM/Tiny-Code Developer (link)

Thanks reader Xandro for the tip.

—

Apple’s (AAPL) relations with third-party developers have never been easy, and the little psychodrama that unfolded over the weekend with a one-man outfit called Tiny Code is a classic case in point.

It started on Friday when Tiny Code, which publishes applications and software patches for the iPhone, announced on its website that it was no longer working with firmware 1.1.3 — the current version of the iPhone’s underlying software. Then it added:

We can’t say much, but we are working with Apple and with their SDK for the next firmware release and SDK applications and we shouldn’t be missed for long. We will no longer update our Installer.app repo for legality reasons and you should see us soon on iTunes.

This was news. Steve Jobs had announced in October that Apple would be releasing its much-anticipated iPhone SDK (Software Developers Kit) before the end of February, and there were reports last year that a handful of large third-party developers — like the giant gaming company Electronic Arts — had been seeded early copies. But this was the first evidence that Apple was reaching out not only to smaller developers, but to a programmer who had been deeply involved in developing unauthorized apps for jailbroken iPhones.

Then, in a sidebar, Tiny Code adds:

UPDATE: We are now targeting fw 1.1.4 Alpha 2.

This was the first anybody outside Apple’s nondisclosure circle had heard anything about 1.1.4, and it set off a rush of speculation. Did the fact that the firmware was in alpha 2 mean that it was just around the corner — perhaps for release at the rumored Feb. 26 Apple event? Did the fact that it was not yet in beta mean that it was running late? Would it be released with the SDK or a few weeks after? Would it break all the existing third-party apps and send the hackers who unlock iPhones back to square one? (see, for example, here)

No sooner had the speculation started than Tiny Code’s website disappeared, replaced with an inoffensive link to Apple’s official iPhone Dev Center. The original message (pasted above) was preserved in a screen grab at macenstein, one of the first websites to report the story.

How is this an illustration of Apple’s uneasy relations with third party developers?

Because of what happened next. Kelly™, the man behind the one-man Tiny Code operation, tells the story in a four-point message posted yesterday on a MacRumors forum:

One: Yes, I have a copy of the Apple SDK for the iPhone targeting firmware 1.1.4.

Two: Yes, Tiny-Code.com was ordered to be removed from operation by Apple, Inc because by releasing firmware versions and stating I had possession of the firmware and SDK was apparently a violation of the Non-Disclosure Agreement I agreed to when I accepted a copy of the SDK and firmware.

Three: Yes I was wrist-slapped by Apple and won’t be included in any further firmware beta’s or testing/coding.

And finally, Four: No I cannot disclose any more about anything without getting into more trouble, stating the above is ok because well let’s face it, there is documented proof I already have and Apple already backhanded me for it. (link)

As Seinfeld’s soup man might have put it: “No more soup for you, Tiny Code!”

Want to watch an Apple analyst change his tune?

Shaw Wu of American Technology Research was an early skeptic of efforts to unlock iPhones to run in other countries and on networks other than AT&Ts. Last October, when some analysts were putting the number of hacked iPhones as high as 100,000, he insisted that the real number was so small as to be “immaterial.”

Today he’s saying something quite different. In a report issued to subscribers, he’s come out with the highest estimate of unlocked iPhones we’ve seen to date. He writes:

We believe the hacked iPhone market is much larger than expected. Our sources indicate that iPhone is being used in 35-40 countries vs. the 4 authorized countries. Out of the 4 million iPhones shipped, we estimate at least 1 million, and perhaps as high as 1.5 million may be hacked.

Although Wu concludes that Apple’s (AAPL) fundamentals are strong and that the company is better positioned than most to weather a looming recession and a slow-down in consumer spending, the rest of his report makes for sobering reading.

• MacBook Air sales look “somewhat underwhelming,” although the new machine is helping drive traffic to the Apple Stores, where other Macs are showing “continued momentum.”
• iPods appear to be tracking 9.5 to 10 million units for the quarter, below the most bullish estimates of 11-12 million units. “We do not think the overly optimistic have factored enough of a seasonal decline and overestimated low-end shuffle demand,” he writes.
• iPhone shipments “appear weak” and AT&T subscriptions are “looking light,” with the above caveat about how many iPhones are being hacked.

In the end, Wu believes that the number of unlocked iPhones won’t matter as much to Apple as it might to AT&T. “While hacked iPhones have some impact to deferred revenue,” he writes, “we are not overly concerned as iPhone is only a 3% contributor to reported revenue. Even if we model zero iPhones for the March quarter, it would only have a $0.03 impact to EPS.

For more on where those unlocked iPhones are going, see The iPhones of Equatorial Guinea.

You can’t just click a button and unlock a new Apple (AAPL) iPhone to run in any country or on any carrier’s network.

That would be too easy.

But the software unlock for 1.1.3 iPhones published early this morning by George Hotz, and widely publicized by Engadget and others, has now been translated out of geek-speak and into step-by-step procedures that ordinary mortals can follow. There are several versions on the Net, but the clearest one we’ve seen so far is at Pinky’s Brain Blog here. In addition to the four-step recipe, it provides screengrabs and all the necessary links. The usual caveats (risks, bricks, etc.) apply.

UPDATE: Pinky, who still hasn’t found time to complete his instructions, is now pointing visitors to iClarified’s tutorial here.

Hotz, you may recall, is the Glen Rock, New Jersey teenager who achieved national attention last summer when he helped unlock the original iPhone. A detailed account of his latest marathon feat of reverse programming — and a DONATE button you can click if you want to support him with a contribution — is available here.

It’s one of the smallest nations in Africa, roughly the size of Hawaii with a population of half a million. Yet the former Spanish colony of Equatorial Guinea tops the list of iPhone-using countries compiled by Net Applications, which issued a report on Friday that ranks them by the relative frequency with which the Web was accessed in January via an Apple (AAPL) iPhone.

“We’ve heard the rumors that many iPhones are being used outside the officially sanctioned countries,” writes the net service company in iPhones Without Border. “So, we decided to check it out and surprise, surprise, it’s true. The iPhone has a presence in almost every country on earth.”

The full list can be seen at NetApplications.com. I’ve pasted as much of it as I could fit in a screen-grab below the fold.

Given that Apple has only sanctioned iPhone use in four countries — the U.S., the U.K., Germany and France — it’s amazing how widely it is now being used. If you were wondering where those 1 million unlocked iPhones went, this may be the answer.

In fact, there were only five countries in the survey where the iPhone did not show up — South Korea, Lithuania, Taiwan, Malta and Iran — perhaps in some cases because GSM and EDGE aren’t supported there.

It’s also surprising, at least at first glance, how many third world countries turn up near the top of this list. Two out of every 1,000 Americans now surf the Web using an iPhone, according to Net Applications, but in the Ivory Coast that number is nearly five per thousand. In Equatorial Guinea, it’s better than two per hundred. [UPDATE: It has jumped overnight to more than one in ten in Equatorial Guinea, according to the weekly stats.]

Or maybe it’s not so surprising, given the explosion of cell phone use in Africa over the past five years (see, for example, here). In countries where wi-fi and Ethernet connections are rare, a $400 iPhone may be a relatively cheap and dependable way to reach the Internet.

And it’s really not so surprising to find Equatorial Guinea in the No. 1 spot. The country’s economy has boomed since the discovery of offshore oil reserves in 1996. According to the CIA Factbook, Equatorial Guinea now has the fourth highest per capita income in the world, after Luxembourg, Bermuda and Jersey.

Having stirred up a hornet’s nest with his first take in the so-called missing iPhones, Bernstein Research’s Apple (AAPL) specialist Toni Sacconaghi has taken a second look at the discrepancy between the number of iPhones Apple sold (3.75 million through Dec. 29) and the number AT&T (T) actually activated (just under 2 million through Dec. 31).

His conclusion: most of the devices he describes as “missing in action” are not sitting in warehouses, as he originally surmised, but were siphoned off into the gray market for unlocked iPhones. His best guess is that in 2007 as many as 1 million iPhones may have been hacked by resellers and activated by carriers that are not paying Apple a kickback on every monthly charge.

This is a big problem for Apple, says Sacconaghi. For every 1 million iPhones that get sold for unlocking, the company forgoes, by his calculation, $300 to $500 million in future revenues and profits.

Here’s the dilemma as he sees it:

If Apple were to somehow stop the sale of unlocked iPhones (by forcing customers to activate them at the point of purchase, say) the company might miss its target of selling 10 million iPhones in 2008 — and forgo even more revenue and profit.

But if Apple does nothing, it gets hit with a double whammy. Not only are its healthy gross margins reduced (unlocked iPhones generate 50% less revenue for Apple and 70-75% less profit, according to Sacconaghi), but growing new markets overseas gets harder. If the company can’t stop the flow of unlocked iPhones into a country like China, what’s the incentive for a Chinese carrier to pay the stiff premium Apple demands for the right to be that country’s exclusive carrier?

Sacconaghi continues to believe — almost alone among major analysts — that Apple will have a hard time reaching its goal of selling 10 million iPhones in 2008.

“In order to achieve this target,” he writes, “we expect Apple will have to lower the iPhone’s price, introduce new (likely lower-end) models, and/or forego revenue-sharing in certain geographies, all of which would compromise the iPhone’s economics.”

Of course, it’s widely expected that Apple will lower the price and introduce new models this year. It remains to be seen whether it will have to do anything about those sweet revenue-sharing deals it’s been cutting with the carriers.

End-of-year sales figures for Apple’s (AAPL) iPhone in Europe are trickling in, but not in any form that can be definitively pieced together.

That latest news comes from Germany, where the head of Deutsche Telekom’s T-Mobile division said in an online interview Saturday that it had signed on 70,000 customers in the 11 weeks since the device went on sale. (link)

What’s not clear is whether that number represents iPhone sales or iPhone activations — an important distinction in T-Mobile’s case because for 2 of those 11 weeks it was required by court order to sell unlocked iPhones. Despite the stiff 999 euro ($1,460) price tag it set for unlocked iPhones, the company reported at the time that “many sold.” Assuming those buyers activated their iPhones with other carriers, they cannot be counted as T-Mobile customers.

France Telecom’s Orange division, meanwhile, reported in early January that it sold 70,000 iPhones in just four weeks. But Orange did say how many iPhones it had activated — sure to be less than 70,000 because Orange was required by French law to sell unlocked iPhones during the entire period.

O2, the exclusive carrier of the iPhone in the U.K., hasn’t issued any sales figures yet, but the Financial Times, citing unnamed “people familiar with the situation,” claims sales in the first 8 weeks came in at 190,000. (link)

Four weeks, 8 weeks, 11 weeks. Activated, sold. Locked, unlocked. There’s no logical way to sort those number out.

But that hasn’t stopped U.S. analysts. When trying last week to unravel the discrepancy between Apple’s iPhone sales (3.7 million in 2007) and AT&T’s activations (less than 2 million), Bernstein’s Toni Sacconaghi and Piper Jaffray’s Gene Munster both seem to have toted up those numbers, added a fudge factor, and come up with 350,000. (See The case of the missing iPhones.)

Is 350,000 good or bad? It’s hard to tell. O2 said it was “happy” with its sales figures, although they seem to have come in below O2’s initial target of 200,000 units. Similarly, France Telecom said its 70,000 sales were well within its target range of 50,000 to 100,000, although as Wired points out, CEO Didier Lombard told Europe 1 radio he hoped to sell 100,000 iPhones before the end of the year, not 50,000 to 100,000. (link)

Deutsche Telekom, perhaps wisely, doesn’t seem to have issued any public sales target. What Philipp Humm, head of T-Mobile Germany, did say in that online interview yesterday, according to Reuters, is that “the iPhone is by far the most sold multimedia device in T-Mobile’s portfolio.”

That I believe.

What’s next for the Apple (AAPL) iPhone? A flurry of new features — starting with a “locate me” pseudeo-GPS function on Google Maps — according to leaks that have been making the rounds of the Apple blogs.

The scoop goes to GearLive.com, which for the past two days has been exploring what appears to be a pre-release version of firmware update 1.1.3. The improvements (documented with screenshots) that it has discovered so far include:

• Edit Home Screen - Rearrange icons on your home screen
• Drag icons around with your finger
• Locate Me integration with Google Maps (apparently by triangulating cellphone towers)
• Send SMS to multiple people
• Add Safari Bookmarks to your Home Screen (example)

Responding to commentary that questioned the veracity of their claims, GearLive’s Andru Edwards and Nate True have posted an eight-minute video walkthrough of the new features that seems to have made believers of the skeptics. YouTube has removed its mirror version, but you can see the original here.

It’s not clear how the pre-release software made it out of Cupertino’s secretive skunkworks two weeks before Steve Jobs’ Macworld keynote. Ars Technica reports that it may have been leaked by someone at Apple as a Christmas present to an iPhone hacker to aid in jailbreaking efforts. As with the last update, version 1.1.3 disables unlocked iPhones and breaks third party applications that run on jailbroken phones.

UPDATE: France Telecom today set its prices for iPhones locked and unlocked. See France’s $956 iPhone.

Apple’s (AAPL) iPhone goes on sale in France Wednesday night for 399 euros ($593) with a 2-year contract, and although we don’t know yet how much France Telecom plans to charge for an iPhone without a contract, we do know that it will be less than 999 euros ($1,485 at today’s exchange rates).

That’s how much T-Mobile is charging in Germany for unlocked iPhones, having been forced by court order to offer the devices both with and without a contract (see here).

France Telecom’s Orange division is also required to sell the iPhone in both configurations, but in an interview today with Europe 1 radio, Orange chief Didier Lombard said he planned to sell unlocked iPhones at a price “significantly lower” than 999 euros. Lombard also said he expected to sell “a little under 100,000 iPhones” before the end of the year.

Unlocked iPhones have been available on the gray market in Europe ever since September, when the first free unlock programs became available. You can pick them up in some French supermarkets for 999 euros. Look for those prices to come down, starting now.