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Summary:

The iPhone 4S is being hailed by pretty much every quarter as a success these days, including users, carriers and analysts. But Apple is also making gains in a less brightly lit area of smartphone sales: the world of gray market devices on prepaid contracts.

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The iPhone 4S is being hailed by pretty much everyone as a success these days, including a veritable pile-on of analysts chiming in to anticipate a fourth-quarter rise in sales for the shiny new device. But Apple is also making gains in a less brightly lit area of smartphone sales: The world of gray market devices with pre-paid service.

Small carriers offering big advantages at home

A Mission Local story on Thursday describes this as a key growth area for the iPhone that doesn’t often get the attention of launches on major new networks such as Verizon. It mentions H20, a small regional MVNO that uses AT&T’s 3G network and also offers monthly service at rates 5o percent below what the iPhone’s authorized carriers can promise, including cheap international calling, which is a winning deal for immigrant populations. H20, and others of its ilk, are seeing new customers sign on for its contract-free, prepaid service at a remarkable rate. At one general wireless and computing store in San Francisco, sign-ups for the small carrier had exceeded 10 per day, according to the store clerk.

Small carriers and MVNOs come with significant downsides: Service could be cut off if technology changes or contracts with carriers they rent tower usage from ends, and customer service can be positively atrocious. Plus, with H20 at least, there’s no way to send multi-media messages (image, voice, audio or contacts). But with monthly charges at half what you’d expect to pay on one of the big three for comparable services, it’s a trade-off many appear willing to make.

Bypassing the “new” tax

There’s also the benefit of being able to bring your own hardware, too. People can get iPhones for much cheaper than the going rate for unlocked devices on Apple’s site, either used or through less-than-legal sources, and carriers like H20 have no qualms about working with local shops that perform unlocking services to get them set up. Even if they end up paying a little more upfront for an unlocked iPhone, they save big on cheaper monthly fees. Even on larger networks, like T-Mobile’s, the practice of bringing unlocked iPhones to a network that can’t even fully support them has a lot of appeal, or at least that’s what 1 million users seem to suggest.

China’s thriving gray market

In China, the gray market is huge for the iPhone and other Apple products. For instance, half the iPads sold in the country as of October were from unauthorized sources, according to a report from Analysys International. The iPhone 4S also sparked a lot of gray market demand. When it went on sale in Hong Kong, stores were swamped with shoppers intending to resell devices, and the price soon after its launch in the U.S. was in the $2,000 U.S. range in Chinese electronics markets.

Getting its iPhone into the hands of as many customers as possible is good for Apple, even if it doesn’t necessarily happen through legitimate channels. Trends like those listed above, where users are jumping onboard the iPhone train through any means possible, eventually mean Apple will have more potential customers for its media stores. The broader potential audience can also be influenced by Apple’s halo effect, through which iOS device owners tend to buy more Macs and other Apple products.

Apple laying the groundwork for a gray future

Apple doesn’t appear to be doing much to combat its gray market success; in fact, if anything, it has taken steps to encourage off-contract business in recent years, by selling factory unlocked devices directly through its own store. These are much easier to resell on eBay or in other second-hand markets, thereby fuelling opportunities for pre-paid users. That, and the continued availability of cheaper devices like the iPhone 3GS, stand to benefit Apple more in the long run than it would appear at first glance, since they can stick around and encourage Apple’s pre-paid growth, even after their original owners are done with them.

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