Breaking Apple's Grip on the iPhone

Firms Launch Sites Selling Unauthorized Software for Device, Posing Challenge to Official Online Store

Apple Inc. faces a growing threat to its iPhone business, as renegade stores spring up online to sell unauthorized software for the device.

The developer behind some popular iPhone software on Friday plans to open a service called Cydia Store that could potentially sell hundreds of iPhone applications that are not available through Apple's official store. Users must download special software that alters their iPhones before they can run these programs.

Another small company plans a store called Rock Your Phone for iPhone users who have not yet modified their devices to make it easier to download and buy unauthorized applications. A third start-up is building an online store that specializes in selling adult games for the iPhone.

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Unauthorized iPhone software includes PdaNet, below, which makes the device into a laptop modem.

The new stores take aim at one of the underpinnings of the iPhone's success: Apple's App Store. Launched last July, Apple's online store sells thousands of applications developed by independent developers -- from games to news and entertainment features -- that customers can easily download to their iPhones, often for free or as little as 99 cents.

When Apple opened the App Store, it provided the building blocks so independent programmers could create software that worked on its phone. But the company said it would vet submissions to maintain quality control and to protect the user experience.

Apple, which collects a 30% commission from sellers on its store, doesn't break out the site's revenue. Brokerage firm Piper Jaffray estimates the site generated about $150 million in sales last year and projects total sales will grow to $800 million this year.

Apple did not respond to requests for comment. But it has said in the past that with the iPhone it was trying to strike a balance between a closed device like the iPod and an open device like the PC.

The upstart sites can carry software programs that Apple's official store won't, since the company tightly controls the kinds of applications it allows. Among the programs that Apple doesn't allow is a free one called Cycorder, which turns the iPhone into a camcorder. Another program, which costs $29, dubbed PdaNET lets people use their iPhones as laptop modems to connect to the Internet.

Jay Freeman, who created Cycorder and is behind the Cydia Store, says he decided to open the store so developers like himself have a way to make money from their efforts. Mr. Freeman, a 27-year-old computer science doctoral student in Santa Barbara, Calif., says he intends to charge developers no more than the commission Apple does for his site's billing services.

A big hurdle the Cydia Store and others face is that the applications they offer typically only work on iPhones that have been modified, or "jailbroken," to allow users to download unauthorized programs.

Apple maintains that jailbreaking an iPhone violates copyright laws. Mr. Freeman says software he created to modify the iPhone has been installed on about 1.7 million iPhones.

The alternative stores could cut into Apple's revenue at a time when software has become an important way for the Cupertino, Calif., company to continue profiting from iPhones, even after consumers have shelled out $199 to buy them.

The App Store is also strategically significant, since it keeps consumers tied to using their iPhones. Already, customers have downloaded more than 500 million applications from the App Store.

But the App Store rejects some submissions, for technical and content reasons. It is also so sprawling that it can be difficult for a new developer to get programs noticed, says Adam Engst, publisher of TidBITS, a site specializing in news about Apple. "It leaves open the possibility that independent stores could do a better job."

Samir Shah is one developer who supports the Cydia Store. The 25 year old, who founded Snapture Labs LLC with two college friends a year ago, created a $7.99 camera application that lets users zoom, change photo sizes and instantly preview photos.

Snapture is a $7.99 camera application that lets users zoom, change photo sizes and instantly preview photos.

"Competition is always good," says Mr. Shah. "Competition breeds innovation."

Apple appears to be gearing up for a fight. While the company hasn't taken legal action against any group or individuals for modifying iPhones or building applications on top of them, it last month filed a 27-page statement with the U.S. Copyright Office, which oversees patents. In its statement, Apple made a case that the use of software to modify iPhones is illegal, according to the Digital Millennium Copyright Act.

Aaron Perzanowski, a professor specializing in digital copyright law at the University of California Berkeley School of Law, believes developers have "a pretty good" defense under the DMCA if Apple claims what they're doing is illegal, though it's largely uncharted legal territory.

Cydia Store's Mr. Freeman, who has been on the lookout daily for email from Apple, isn't taking any chances. He says he has lined up a lawyer in case Apple takes legal action. "The overworking goal is to provide choice," he says. "It's understandable that [Apple] wants to control things, but it has been very limiting for developers and users."

Write to Yukari Iwatani Kane at yukari.iwatani@wsj.com