The initial strategy for releasing the iPhone was a departure from the standard industry process in multiple ways. First, AT&T did not subsidize the cost of an iPhone to consumers as it did with every other phone. AT&T also made concessions to Apple that it did not make to any other handset maker, such as giving Apple complete control over the development and branding of the iPhone, and agreeing to not sell the iPhone through third parties like Best Buy and Radio Shack. Lastly, AT&T agreed to share service revenue with Apple, so Apple received a portion of subscription fees paid by iPhone users. While the release of the iPhone was successful, it had only captured less than 1% of the worldwide mobile handset market. This could partly be explained by worldwide “gray market” in which consumers bought unlocked iPhones from unauthorized resellers and used them on unsanctioned mobile networks. As many as 1 million of the 3.7 million iPhones sold by the end of 2007 fell into this market. Realizing this, Apple made some changes in its release of the iPhone 3G.
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