Service-locking could make smart phones bad investments

Unless it gets easier for businesses to use existing wireless phones when switching service providers, enterprises may be hard pressed to justify investing in new top-of-the-line handsets for employees.

Ever wonder why switching wireless phone companies almost always means getting a new mobile phone as well? Experts say that if enterprises don't require wireless carriers to let them use existing phone on compatible network, companies may be forced to prematurely throw away thousands of dollars worth of expensive mobile phones.

Last week the Consumers Union sent a letter to the Federal Communications Commission, asking the agency to prevent wireless carriers from service-locking wireless phones, a practice that prohibits subscribers from using their existing handsets when they switch to a new wireless phone company.

The letter from the Yonkers, N.Y.-based consumer group behind Consumer Reports magazine is the latest action highlighting what some in the industry see as a problematic practice: Forcing businesses to either stay with carriers that may be overpricing their services, or switch to new carriers and face large costs for new wireless devices.

The issues

According to experts, service locking began years ago, partically because carriers were developing ways to reduce churn, or the number of customers who jump from one carrier to another in a given period. It soon became a standard practice, and the FCC and other government regulatory agencies have never addressed the issue.

"The bottom line is that there are millions of customers that are happy with their phones and hate their phone service. Why shouldn't they be able to switch [carriers] without buying a new phone?" said Kenneth DeGraff, a policy analyst with the Consumers Union.

When a business sets up wireless service with a carrier, it buys a large number of phones, often at a discount. However, those phones are locked onto that carrier's network.

So, if an organization terminates service with its carrier, it will be unable to use existing phones with a new service plan from a competitor, said Jack Gold, vice president with the Stamford, Conn.-based research firm, Meta Group.

Gold said each of the major U.S. carriers installs firmware on its phones that prevents them from being used on any other carrier's network. With special codes, the carriers can unlock the phones, but most are unwilling to do so, much to the chagrin of consumers and businesses alike.

"When you buy a radio, you wouldn't buy one that can only get the oldies station," Gold said.

The phones

But Ritch Blassi, a spokesperson for AT&T Wireless Services Inc., said that most devices are replaced every 18 to 24 months, and are therefore obsolete by the time a two-year service contract is completed. He said that AT&T Wireless had received few requests to unlock phones.

Gold, however, said that today's smart phones may last longer than two years. If a business buys thousands of high-end smart phones that cost as much as $600 each, it may want to hold onto those devices for more than two years. In that case, the devices would outlive their service contracts, and businesses should have the option to take their devices to another carrier, Gold said.

Jeff Fugit, director of marketing with Traq Wireless, an Austin, Texas-based company that helps businesses analyze their wireless services, said that a number of his customers have come up against this issue. As devices become more expensive, he said that he expects fewer organizations will be willing to part with them just to change service providers.

According to Gold, devices based on the GSM, GPRS and EDGE air interface protocols are easier to move from network to network. They simply require replacing the SIM card, a controller chip in the back of the phone.

CDMA-based phones require some reconfiguring to be used on new networks. Both types of phones will require additional reconfiguring to be used with data applications, but none of that is prohibitive, he said.

Gold recommends that when businesses negotiate contracts with carriers, they insist on language that requires the carrier to either provide unlocked phones, or unlock phones on request. That way, he said, businesses will not be forced to discard their hardware investments.

For more information

Read our exclusive: Enterprises poised to benefit from carrier swapping rules.

Get an answer to complex wireless billing.

Carriers differ on their policies when it comes to unlocking phones. Verizon Wireless and T-Mobile USA Inc. are the most liberal. Brenda Raney, a Verizon spokesperson, said that the company will unlock phones for its customers, and it welcomes competitors' phones on its network. According to spokesperson Bryan Zidar, T-Mobile will unlock a user's phone for free, after the user has fulfilled 90 days of his contract.

AT&T Wireless has no set policy when it comes to unlocking phones and will address the issue on a case-by-case basis, said Blassi. Cingular Wireless LLC and Sprint PCS Group representatives did not return calls by press time.

The issue is irrelevant for Nextel Communications Inc. subscribers because the carrier uses an iDen network, which requires a special kind of phone.

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