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About 27 per cent of the iPhones sold in 2007 are being operated on unauthorized wireless networks, according to research released today. That works out at about one million handsets.

The unlocked phones are used largely in regions where the must-have device isn't officially sold, according to a report issued by Bernstein Research analyst Toni Sacconaghi. He says the appetite for the modified phones has given way to a cottage industry that sells hacks or phones that come out of the box unlocked. Most phones originated in the US where, thanks to current currency exchange rates, prices are comparatively low.

AT&T reported having about two million iPhones on its network as of the end of the year. Over the same period, Apple said it sold 3.75m units. These figures caught the eye of Sacconaghi last week, prompting him to write an initial research note. "Significant interest" in that note led the analyst to dig deeper into the matter. As a result, he pumped out fresh figures today that include information gained from talking to channel partners and other sources.

"We now believe that 315,000 iPhones were sold in Europe (down modestly from our previous estimate), leaving 1.45m iPhone units missing in action – either sitting in channel inventory or being used 'unlocked,'" Sacconaghi wrote this week.

Subtracting 480,000 units of channel inventory, Sacconaghi reckons about one million phones had been unlocked, up from a previous estimate of 750,000.

The figure represents quite the predicament for Apple.

Unlocked phones represent a significant drag on the profitability of the device. With Apple receiving $300 to $400 in carrier payments for each iPhone sold, they generate 50 per cent less revenue and up to 75 per cent less profit than normal. The 1m phones translates into as much as $400m in lost revenue.

If 30 per cent of the 10m devices Apple expects to sell in 2008 are never activated, sales are lowered by $500 million for each of the two years the carrier contract would have been in place and earnings per share declines by 37 cents.

Unlocked phones also weaken Apple's hand when negotiating terms with prospective new carriers. That's because the promise of being the exclusive network carries less weight.

At the same time, a sale is a sale. If Apple clamps down too much on unlocked phones it forgoes all the revenue it would have made selling them. And equally unappealing, it risks missing its lofty goal of selling 10m devices by the end of this year.

Apple has gone to great lengths to make it hard to unlock iPhones. Updates to patch security bugs typically re-lock the handsets. So far, hackers have managed to defeat the restrictions. Less than a week after the most recent version of the firmware was released, so-called jailbreaks that unlock the phone were circulating online. ®

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