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Freed From Lockdown

Light Reading
LR Mobile News Analysis
Light Reading
11/30/2006

The new exemption allowing cellphone users to "unlock" their handsets, for use on a different carrier's network, has been in effect now for four days, and the world hasn't ended for the Big 4 carriers. Yet.

In general, the carriers have reacted cautiously, if predictably, to the ruling by the Librarian of Congress, which was issued quietly just before Thanksgiving and took effect on Monday. In the rather convoluted federal system for setting copyright policy, the Copyright Office issues a "recommendation" but the Librarian of Congress, presently a gentleman named James H. Billington, issues the actual ruling. The handset-lock rule was one of six "exemptions" granted to allow customers and users to circumvent existing copyright protections without violating the law.

“The underlying activity sought to be performed by the owner of the handset is to allow the handset to do what it was manufactured to do -- lawfully connect to any carrier," wrote Marybeth Peters, register of copyrights, in the text of the exemption. "The purpose of the software lock appears to be limited to restricting the owner’s use of the mobile handset to support a business model, rather than to protect access to copyrighted work itself."

The new exemption does not prevent carriers from continuing to lock down their phones, so they can only be used on the network they're sold for; it just makes unlocking the handset no longer illegal.

Joe Farren, a spokesman for CTIA , says that while the organization is still reviewing the new rule, it could result in higher handset prices for consumers -- largely because of illicit reselling of pre-paid, unlocked handsets, which are sold originally at steep discounts in locked mode, by big-box retailers like Wal-Mart.

"People had been buying subsidized handsets in bulk, and then selling them across the border in Latin America for a lot more than they paid for them," Farren explains. "The providers are losing a tremendous amount of money, and there's the potential [in the new copyright ruling] for a consumer impact in regards to the pre-paid market. There's concern about the handset subsidy and whether or not that will continue to be a viable option."

No one really knows how much carriers lose through illegal exporting of pre-paid phones to South America, and consumer advocates say that's a stalking horse, anyway. The real issue is the difficulty of switching to a new carrier, even once your original service contract is up.

Indeed, GSM phones are originally made to work across any network based on compatible technology. Cingular Wireless and T-Mobile US Inc. , which use networks based on the global standard GSM, add software to prevent the phone from working with another provider's SIM card. Verizon Wireless and Sprint Corp. (NYSE: S), which use networks based on CDMA technology, use a permissions list so that only specified devices can gain access to the network.

And some carriers, including T-Mobile and Cingular, already tacitly allow established users to "unlock" their phones and will provide the necessary codes on request. They just don't advertise the fact.

For now, the ruling will likely affect only users of GSM phones who are traveling internationally and wish to use their handset over local networks. As Farren implies, however, in the longer term the new exemption could disrupt the cozy relationship between manufacturers, like Motorola Inc. (NYSE: MOT) and Nokia Corp. (NYSE: NOK), and the carriers who subsidize their phones for users.

Eliminating the cellphone lockdown will ultimately provide new and conflicting incentives to the manufacturers, who may well prefer to sell more sophisticated, unlocked devices, at higher prices, to consumers who will be loyal to the brand on the phone, rather than to the carrier network over which it runs.

— Richard Martin, Senior Editor, Unstrung

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