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Unlocking Cell Phones May Get Easier

‘A new service from MetroPCS and regulations being considered by the FCC could shake carriers’ control of the $140 billion wireless market.’ -

Unlocking a cell phone is something of a Houdini-esque exercise. Sure, it’s possible to tweak a handset so it works on a network other than the one for which it was designed. But it requires following a series of steps that the average consumer may find complicated—and which could render the device useless.

Little wonder fewer than 5% of U.S. cell-phone owners go to the trouble. But thanks to regulators and one of the country’s fastest growing mobile-phone providers, it may soon get a lot easier to unlock a cell phone. The prospect of more consumers moving from one network to the next without a carrier’s consent is only the latest in a series of trends loosening carriers’ grip on a $140 billion market.

MetroPCS (PCS), which has 4.4 million subscribers and operates in markets including Los Angeles, Philadelphia, and Detroit, in late June became the first well-known U.S. carrier to publicly offer to unlock phones sold by a competing service provider. Under the offer’s terms, MetroPCS will tinker with phones originally sold by Verizon Wireless, Sprint Nextel (S), Alltel, or any other carrier whose network is based on CDMA (code division multiple access), the technology MetroPCS uses. MetroPCS will unlock the phone and provide a month’s worth of calling—all for $30.

The service alone could help MetroPCS attract 200,000 to 500,000 subscribers in the next 12 to 14 months, says Vikrant Gandhi, an analyst at consultancy Frost & Sullivan. “Early indications show a tremendous amount of interest,” says MetroPCS Chief Financial Officer Braxton Carter. An increase at the lower end of Gandhi’s estimate would translate to almost a quarter’s worth of growth for a company that added 1 million customers in 2007—enviable, considering total U.S. subscribers increased by only 9.6% last year.

Following Suit

Other carriers may follow the MetroPCS lead. San Antonio-based Houdinisoft, maker of the technology that helps MetroPCS unlock and reconfigure some 230 different phone models, is in talks with other service providers, particularly those in the prepaid wireless business, says Houdinisoft President Paul Posner. He declines to identify the potential customers. “If other people don’t do it, [unlocking] might be a competitive differentiator,” says Carter.

Unlocking may make financial sense for some consumers. Many prepaid carriers including MetroPCS charge more for cell phones up front because they don’t lock in users with a long-term contract in hopes of recouping a generous hardware subsidy. The cheapest phone MetroPCS offers today costs $99. So by coming to MetroPCS with an existing phone, a subscriber saves at least $69—$99 for the phone minus $30 for unlocking—a substantial amount for anyone, and especially credit-challenged and young consumers typically targeted by MetroPCS and other prepaid wireless service providers. Meanwhile, MetroPCS benefits not only from demand, but also from not having to subsidize a new subscriber’s handset. “It does marginally help our profitability,” says Carter.

Balking at Unlocking

Of course, some carriers won’t sit idly by while MetroPCS and copycats pick off their customers. Early termination fees have a way of fostering subscriber loyalty.

Yet the Federal Communications Commission is considering new rules that would require wireless carriers to reduce the penalties for ending contracts early in cases where a handset isn’t subsidized. Doing away with the fee will make it that much easier for a customer to switch providers without giving up a prized phone.

Even rivals that don’t levy termination fees balk at unlocking. Carriers such as Virgin Mobile and Tracfone have won lawsuits against people buying and then unlocking and reselling handsets overseas. Virgin’s terms of service explicitly prohibit using the handset with another service. In recent testimony before the FCC, Virgin argued that unlocking has cost the company $55 million. It’s not clear whether Virgin’s tack will work in cases where the unlocking doesn’t occur in bulk. What’s more, a legal doctrine called first-sale—which stipulates that if you bought a product, you should be free to resell it—may apply. “We think that language [in Virgin’s terms of service] is unenforceable,” says Robert Bramson, a partner at Walnut Creek (Calif.)-based Bramson, Plutzik, Mahler & Birkhaeuser.

Bramson has spearheaded several cases against Verizon Wireless and Sprint Nextel that have resulted in settlements requiring both companies to inform subscribers that the carriers will help unlock phones when contracts end. (Verizon Wireless, owned by Verizon Communications (VZ) and Vodafone (VOD), has long provided an unlocking code to customers who knew to ask for it.) Because of the settlements, opponents of unlocking used phones may not “have any remaining legal basis,” Bramson says.

Other potential victims of the fallout include handset makers whose sales growth may slow if people hold onto their phones longer.

© 2008, YellowBrix, Inc.

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