"It's such grief and aggravation," said Frederick Smalls, an insurance broker in Whitman, Mass., after spending two hours on the phone with Apple and AT&T Inc., trying to get his new iPhone to work.
In stores, people waited at counters to get the phones activated, as lines built behind them. Many of the customers had already camped out for several hours in line to become among the first with the new phone, which updates the one launched a year ago by speeding up Internet access and adding a navigation chip.
Apple says the problem was the result of a software glitch in the iTunes store, preventing many people from being able to turn on the phone, reports CBS News Science and Technology Correspondent Daniel Sieberg.
Instead, employees were telling buyers to go home and perform the last step by connecting their phones to their own computers, spokesman Michael Coe said.
However, the iTunes servers were equally hard to reach from home, leaving the phones unusable except for emergency calls.
The problem extended to owners of the previous iPhone model. A software update released for that phone on Friday morning required the phone to be reactivated through iTunes.
"It's a mess," said freelance photographer Giovanni Cipriano, who updated his first-generation iPhone only to find it unusable.
And not one likely to endear the new iPHone to the corporate market, to which Applie is pushing the new iPhone, noted CNET-TV's Natali Del Conte on The Early Show Saturday.
Apple shares fell $4.04, or 2.3 percent, to $172.59 in afternoon trading, amid a general decline in U.S. stocks.
When the first iPhone went on sale a year ago, customers performed the whole activation procedure at home, freeing store employees to focus on sales. But the new model is subsidized by carriers, and Apple and AT&T therefore planned to activate all phones in-store to get customers on a contract.
Read CNET's coverage of the new iPhone.
Watch CNET's coverage of iPhone problems.
Read CNET's blog on what to do with your old iPhone
The new phone went on sale in 21 countries on Friday, creating a global burden on the iTunes servers.
The iPhone has been widely lauded for its ease of use and rich features, but Apple is a newcomer to the cell-phone business, and it's made some missteps. When it launched the first phone in the U.S. a year ago, it initially priced the phones high, at $499 and $599, then cut the price by $200 just 10 weeks later, throwing early buyers for a loop.
Rollouts to other countries were slow, as Apple tried to get carriers on board with its unusual pricing scheme, which included monthly fees to Apple. The business model of the new phone follows industry norms, and the price is lower: $199 or $299 in the U.S.
Tom Krazit, a reporter for CNET, told Sieberg, "The fact that it's going to cost a whole lot less now is definitely going to make it more appealing to a wider set of people -- you know, not just the Apple fanboys and gadgetheads."
On Thursday, Apple had problems with the launch of a new data service, MobileMe. The service is designed to synchronize a users personal data across devices, including the iPhone, but many users were denied access to their accounts.
Enthusiasm was high ahead of the Friday morning launch of the new phone.
"There are gonna be Apple faithful who are glad to spend another $200 or more for the higher capacity iPhone," observes CBS News Technology Analyst Larry Magid, "but I think, more importantly, there are people who are holding out, who didn't want to spend $400 or more, who wanted the faster network, who wanted the GPS, and I think this will grow Apple's market share in a very significant way."
Alex Cavallo, 24, was one of hundreds lined up at the Fifth Avenue store, just as he had been a year ago for the original iPhone. He sold that one recently on eBay in anticipation of the new one. In the meantime, he has been using another phone, which felt "uncomfortable."
"The iPhone is just a superior user experience," he said. The phone also proved a decent investment for him: He bought the old model for $599 and sold it for $570.
Nick Epperson, a 24-year-old grad student, spent the night outside an AT&T store in Atlanta, keeping his cheer up with bags of Doritos, three games of Scrabble and two packs of cigarettes. Asked why he was waiting in line, he responded simply "Chicks dig the iPhone."
IPhone fever was strong even in Japan, where consumers are used to tech-heavy phones that do restaurant searches, e-mail, music downloads, reading digital novels and electronic shopping. More than 1,000 people lined up at the Softbank Corp. store in Tokyo and the phone quickly sold out.
"Just look at this obviously innovative design," Yuki Kurita, 23, said as he emerged from buying his iPhone, carrying bags of clothing and a skateboard he had used as a chair during his wait outside the Tokyo store. "I am so thrilled just thinking about how I get to touch this."
The phone went on sale first in New Zealand, where hundreds of people lined up outside stores to snap it up right at midnight - 8 a.m. Thursday in New York.
"Steve Jobs knows what people want," Web developer Lucinda McCullough told the Christchurch Press newspaper, referring to Apple's chief executive. "And I need a new phone."
In Germany, sales were brisk at local carrier T-Mobile's stores, particularly in Munich, Hamburg and Cologne, said spokeswoman Marion Kessing.