The new iPhone and the way it will be sold appear set to shut down a small industry that arose to make the first version of the phone available...

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NEW YORK — The new iPhone and the way it will be sold appear set to shut down a small industry that arose to make the first version of the phone available around the world.

The original iPhone, which launched last June, was initially available only in the U.S. and only for use on AT&T’s network.

In little more than a month, however, enterprising hackers found a way to “unlock” the phone to make it usable on other networks, including foreign ones.

Skirting AT&T

IPhones soon flowed out of the U.S., and analysts have estimated one-third to one-half of the phones sold never made it onto AT&T’s network.

“I saw it in action and I had to have one,” said Ernesto Zeivy, a 50-year-old restaurant owner in Mexico City. He had one friend buy an iPhone for him in San Diego for $500 and another unlock it using software downloaded from the Internet.

Apple on Monday announced a new iPhone for use on 3G, or third-generation, data networks. It will stem the flow of unlocked phones in two ways.

First, the phone will be sold in more countries. Apple added five countries beyond the U.S. for the first phone, but the second one will go on sale in 22 countries July 11.

Apple has said it will reach 70 countries by the end of the year. That takes away one of the main incentives for unlocking.

Second, Apple is abandoning the unusual arrangement under which the iPhone was sold. People could buy them from a carrier or from Apple without activating them on a service plan. That meant they could go home, unlock the phones and never sign up with AT&T.

The new phone will be subsidized by carriers, which accounts for its lower price: $199 for the 8-gigabyte model, down from $399. This brings the phone’s marketing in line with standard industry practices.

The carriers plan to make back what they spend on the subsidy through service fees, likely requiring two-year contracts from everyone who buys the iPhone. AT&T said buyers will have to activate service before leaving the store.

“It’s looking pretty bleak for unlockers,” said John McLaughlin, founder of, a New York company that sells unlock codes for cellphones. After being warned away by AT&T’s lawyers, it doesn’t help unlock iPhones. Unlocking software is available free online.

Apple tried to secure the device with its software updates but couldn’t. It’s the requirement that buyers of the new phone sign up for service in the store that will be hard to get around, McLaughlin said.

Freeit4less, a company in Syracuse, Utah, has posted prices on its Web site for unlocked 3G phones at $100 above store prices, but Chief Executive Kyle Jourdan said it is not accepting pre-orders given uncertainty surrounding the activation requirement.

“We’re just crossing our fingers and hoping for the best,” Jourdan wrote in an e-mail, speculating Apple or AT&T may sell unsubsidized phones, which would leave an opening for his company.

Freeit4less has sold about 121 unlocked first-generation iPhones and 5,104 licenses for unlocking software, he said.

What’s legal

Federal law allows consumers to unlock their own phones. But selling someone the means to unlock a phone and unlocking another person’s phone may be illegal.

At least one U.S. carrier has won civil cases, not involving iPhones, against unlocking businesses.

AT&T charges customers who break a two-year contract within the first month a $175 early-termination fee plus the $36 activation fee. That would bring the cost of the new iPhone to $411 for an unlocker, slightly more than the old model’s $399 price.

That may mean it is still attractive to unlock iPhones for use on other networks and that AT&T will lose money on unlockers. Analysts estimate AT&T will subsidize the phones by more than $200 each.

But Ralph de la Vega, head of AT&T Mobility, said Monday the company and Apple are working on “penalties” for users who buy phones and don’t activate them within 30 days. AT&T could, for instance, bar buyers who repeatedly buy iPhones and break the contracts from buying more.

Associated Press reporter Alexandra Olson in Mexico City contributed to this story.