November 26, 2012 at 11:52 am

Apple Stops Selling iPhone in Some Stores, Source Says to Fight Duplicitous Resellers

apple store iphone 5 not selling detroit

Are you having a hard time buying a new iPhone 5? You’re not alone.

Hon Hai Precision Industry, whose subsidiary manufactures iPhones, said some of these delays are due to design-related production difficulties. However, at least some delays and shortages during this holiday season appear due to unscrupulous resellers recruiting pawns to buy the maximum number of iPhones at Apple and other stores — trashing their credit ratings as they increase the price of your cellphone.

These recruited buyers have no intention of paying the monthly bills that qualify them for plan-subsidized phones, a confirmed Apple store employee tells Evolver.fm, which typically represent $450 each (Apple does not allow employees to answer press questions, so our source is anonymous). Instead, the buyers in question purchase iPhone 5s at its subsidized, “with-plan” price to turn a profit while driving up the price of all phones a little bit and contributing to iPhone 5 shortages and delays.

Caveats: 1) We have one anonymous Apple Store source, some of whose information we have confirmed, 2) Apple appears to be solving the problem in an admirable, if inconvenient way, and 3) You will still probably be able to buy an iPhone 5 in time for the holidays, if that’s what you’re after (or if you’re worried about shortages or a low activations affecting Apple’s stock price).

To take advantage of the situation, driving up prices and contributing to shortages, duplicitous batch-buyers would quickly transfer iPhone 5s to “iPhone kingpins,” whom Apple calls “resellers” internally. Pawns of these iPhone kingpins, or resellers, essentially were ruining their own credit for a small payment from resellers, who were making the real money.

The reseller unloaded the phones for a much larger profit, possibly overseas. Unlocked phones typically cost far more than the subsidized, locked kind, and there are no unlocked iPhone 5′s officially for sale yet — another reason Apple likely became so concerned about this.

Sometimes, says our Apple source, buyers sometimes try changing clothes and getting back in line to try to buy another maximum allotment of phones.

“There are huge rings of people who organize this, getting grandma or young idiots to destroy their credit rating for a fraction of the resale price,” said our source, who asked to be kept anonymous because Apple doesn’t allow employees to talk to the press. “It’s so predatory; it reminds me of the housing crash, when mortgage brokers were giving credit to people who had no means to pay it back.”

Apple has long known about the problem, says our source. Last week, the company took a bold step to stop resellers from taking advantage of the pawns and costing the rest of us non-fraudulent purchasers, whose costs are run up by the insurance payouts for these “stolen” phones.

As Evolver.fm confirmed by phone, you can no longer buy the iPhone 5 in person at Detroit-area Apple stores, with Sacramento Apple Stores, locations in China, and possibly others to follow. Instead, buyers in those areas now have to buy them online rather than at those stores.

Yes, Apple has ceased selling its most popular retail product — a major source of revenue — in at least one major metropolitan areas, which should provide an indication of how serious the problem was — especially as shopping ramps up for the holidays.

Go, Apple, but still, you might be wondering: Why wouldn’t the cellphone service carriers (AT&T, Sprint, and Verizon), who sell the phone along with Apple, put an end to this costly practice by enforcing more stringent credit checks? Why did the cellphone companies keep approving the sale of subsidized phones to people who failed Apple’s own in-store checks?

Our source has a suspicion: “Somebody at the carrier is making a lot of bonus money with all of these new two-year contracts being signed, but the stockholders and legitimate subscribers [of the wireless carriers] are not clued in to what this volume represents,” explained our source. “The carriers are adding all kinds of tricky fees to make up for this massive money suck… I’ve been waiting to see if anyone writes a comprehensive story about this for so long.”

(It’s also worth pointing out that the carriers don’t have to provide the service the people with these scrapped plans bought with that subsidy; other consumers may still be, however, affected, as our source alleges they are.)

Again, Apple has admirably taken steps to combat this situation — and it did so without racially profiling its customers, which our source claims some iPhone 5 carriers urged Apple to do, to the horror of Apple executives who had flown to Detroit to watch this scene unfold in person before doing something about it this November.

“Verizon Wireless has a number of security procedures in place to protect against fraudulent activities, but we don’t discuss our security measures,” said Verizon spokeswoman Brenda Boyd Raney. Neither AT&T, Sprint, nor Apple’s headquarters responded to Evolver.fm‘s inquiries.

This was a high-volume problem, and it could be happening at other Apple Stores, too.

“Just for scale, most stores in the U.S. do about 100 activations a week on iPhones, and we were doing 10 times that in just our store,” said our source.

Given that all of these fraudulent purchases were driving up the price of your phone and mine, Apple had to take action, which is great news. However, if the carriers had exercised more caution in selling subsidized phones, this may not have ever become a problem.