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Report: iPhones piling up at AT&T stores

The huge gap between the number of iPhones sold by Apple and the number activated by AT&T can't be explained by international sales or unlocked units alone.

Is demand for the iPhone in America already starting to wane?

AT&T, the exclusive American carrier of the iPhone, activated just 900,000 iPhones during the fourth quarter, the company revealed during its earnings conference call Thursday. It wrapped up the year with "just at or slightly under 2 million iPhone customers," according to company executives.

Apple announced at Macworld that it has sold 4 million iPhones through the middle of January, and Toni Sacconaghi, a financial analyst with Sanford C. Bernstein, thinks the gap between the figures means that Apple might have a demand problem. He released a research note Thursday after AT&T's earnings saying that the carrier's figures imply that an awful lot of inventory is building up at Apple's channel partners.

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"We believe the data points to a significant amount of iPhone channel inventory...This is negative in two ways: (1) it indicates end-user demand for iPhone is lower than many investors may think based on Apple's sales figure; and (2) it points to slower iPhone sales in the current quarter, since much of this inventory is likely to be drawn down," Sacconaghi wrote in his report.

Let's walk through the theory. Apple said on Tuesday that it sold 3.7 million iPhones in 2007. But AT&T said Thursday that it ended 2007 with around 2 million iPhone customers.

One huge difference between the third quarter and the fourth--other than the temperature--was that the iPhone became available for sale in the U.K., Germany, and France through other carriers. But even the most optimistic estimates for iPhone sales in Europe didn't come within shouting distance of 1.7 million units. O2, the exclusive iPhone carrier in the U.K., has said it expects to have sold 200,000 iPhones by around this time, and France's Orange and Germany's T-Mobile were expected to sell about 100,000 units each in 2007.

So that leaves 1.3 million iPhones to find. (Sacconaghi only estimates European sales at 350,000, so he uses 1.4 million.) The first theory would be that iPhone unlocking is rampant.

But how is that possible? The Great iPhone Hack settled into a bit of a stalemate with the release of the 1.1.2 firmware. On the day the iPhone was released in the U.K. and Germany, Apple released the 1.1.2 firmware upgrade for older iPhone users but included an updated version of the iPhone's bootloader--which loads software from storage--on all new iPhones that made unlocking the phone to run on other networks much, much harder and virtually impossible through software.

After venturing a guess in October that as many as 250,000 iPhones had been purchased with the intention of unlocking, Apple Chief Operating Officer Tim Cook declined to make an estimate this time around, saying the company didn't have a reliable way of estimating the total. According to Sacconaghi, even if you assume 20 percent of all iPhones purchased in 2007 were bought with the intention of unlocking--which was Cook's rough estimate in October--that still leaves 670,000 iPhones unaccounted for in 2007. Where are they?

Apparently, they're on a shelf somewhere. "Excluding Apple's own stores, there are about 4,400 total iPhone distribution points worldwide, suggesting each had more than 150 units of channel inventory at the beginning of this year. We believe channel inventory likely built even more in the first few weeks of 2008, given Apple continued to ship iPhones at a high run rate," Sacconaghi wrote.

Apple still expects to sell 10 million iPhones during 2008. It can easily do that with launches in Asia and other European countries, a new 3G model, a price cut, significant new applications delivered in February alongside the release of the software developer's kit, or all of those factors. It's not hard to imagine that a lot of people are waiting for a faster iPhone.

But it is hard to believe the iPhone phenomenon might already be subsiding in the U.S. after just six months, although Wall Street is clearly worried about Apple this week despite soaring Mac shipments and an excellent holiday quarter. Apple's stock has lost 15 percent of its value this week. Granted, it was a bad week for lots of companies, but even in the face of a broader rally Wednesday and Thursday, the stock continued to shed value Thursday.