German Court Backs Apple, T-Mobile on Locked-Up iPhone

Apple (Nasdaq: AAPL) and its carrier partner in Germany won a key legal victory Tuesday, with a court tossing out an injunction that had forced T-Mobile to offer an unlocked iPhone and upholding the legality of the exclusivity agreement.

T-Mobile won the right to offer the iPhone only to customers who agree to two-year contracts with the carrier, overturning a lower court's ruling that had forced the carrier to offer an iPhone that worked on other networks.

T-Mobile rival Vodafone (NYSE: VOD) had won that injunction after raising questions about the legality of the exclusivity agreement and as a result, the very basis of Apple's strategy with the iPhone.

Locked Up

In the U.S., AT&T (NYSE: T) is Apple's exclusive carrier for the iPhone. Orange is the only carrier authorized to the sell the device in France; T-Mobile won the right to sell the handheld in Germany.

At Vodafone's request, a court had issued an injunction requiring that T-Mobile offer an unlocked iPhone. It complied with that order by offering the device for 999 euros, or nearly US$1,500 -- almost three times what the phone retails for with a two-year calling and data plan.

T-Mobile said it would no longer offer that option in the wake of the new ruling.

Sour Grapes?

Vodafone was known to be in the running for the contract to carry the iPhone but lost out to rivals in key markets. In the United Kingdom, O2 is the exclusive carrier, but Vodafone has said that agreement is allowed under UK law, while it sill feels the tie-up in Germany is not lawful.

Vodafone will review the German court's ruling before deciding whether to pursue an appeal, it said. The court gave the company a one-month window to do so.

T-Mobile sold an unspecified number of unlocked phones in recent weeks despite the high price tag, the company said, adding that it is now telling customers they will be able to unlock their phones once their initial two-year contracts run their course.

In France, Orange sells unlocked iPhones as well -- for around US$1,000 -- and in the U.S., customers have been known to manually unlock phones, even though Apple has warned that key features may not work if the phones are unlocked from the AT&T tie-up.

The exclusivity arrangements come with financial incentives, with carriers making payments to Apple in exchange for the right to sign customers to two-year agreements, Enderle Group Principal Analyst Rob Enderle told MacNewsWorld.

"An exclusive deal comes with financial enhancements, and this deal was so aggressive that no other carrier wanted it," he said.

Vodafone's complaint was based on a provision of German law requiring that exclusive phone offers include a retail subsidy to consumers.

No One Else

In the United States, there was significant early interest in unlocking the iPhone from the AT&T network, Enderle said, but that has waned after stern warnings from Apple about the phones not working right once they were unlocked.

"You don't see much activity anymore because folks don't want to brick their phones; but they still want to do this, and not being able to is probably causing a large number of potential buyers to not buy the iPhone," Enderle said.

One problem for Apple is that it chose a relatively unpopular carrier in AT&T, he added. "Had they chosen Verizon, the most popular carrier, the problems would have been vastly reduced."

Apple's European launches came with the benefit of its U.S. debut, which happened in June after six months of anticipation after the device was unveiled by Steve Jobs last January.

The fact that it kept the exclusivity model in place indicates it's an approach that works for Apple, even though it may prevent some customers -- notably those who are already in long-term contracts with other carriers -- from being able to buy the iPhone for the time being.

"Apple has learned quite a bit from feedback from all the users during the last couple months," telecom analyst Jeff Kagan told MacNewsWorld. Though they are unlikely to offer unlocked phones, "they will use that feedback in next-generation phones, both in the U.S. and overseas."