Cell phone lockdown

Like millions of other U.S. cell phone customers, Terry Julians says she was excited about new regulations that let subscribers keep their old numbers when switching carriers.

But the change proved more difficult than she imagined when she learned she couldn't use her old phone, worth more than $300.

"I like keeping my old telephone number, but I'd like it even better if I could switch and keep my old phone," said the San Francisco advertising executive, who went ahead and switched despite the unwelcome hurdle.

Local number portability (LNP) regulations went into effect a week ago, in a move that's widely expected to inject more competition into the cell phone industry. But the new rules leave room for improvement, according to cell phone customers who, like Julians, say an overhaul is overdue for industry practices that effectively lock devices to a single network.

Carriers typically place network restrictions, along with long-term service contracts, on phones they give away free or with substantial discounts. Those incentives have long helped carriers fend off customer turnover, and analysts said they have become even more important in the wake of local number portability.

Nearly all of the United States' 152 million cell phone users have signed some long-term contract, according to United Kingdom-based research firm Analysys. With so many customers locked in for the immediate future, carriers have managed to temporarily stall the flood of people expected to switch their cell phone carriers now that they can take their old telephone numbers with them.

Cell phone subscriber turnover has not shown much fluctuation since the regulation went into effect, and it will likely take many months for the rule's effects to be fully felt, industry insiders said.

"The reality of LNP is inverse to the hype that preceded it," said Mark Siegel, an AT&T Wireless spokesman.

Aside from business reasons, there's a laundry list of technical "why nots" that carriers use to justify locking down phones.

Cell phones all use modems. The most common are Code Division Multiple Access (CDMA) and Global System for Mobile Communications (GSM), which can't work together. Regardless of policy changes, someone switching from AT&T Wireless, which uses GSM in its network, would have to buy a new phone if switching to Sprint PCS, which uses CDMA.

When switching between compatible networks, it's still not a guarantee that someone can take their old phone with them, because carriers often use different parts of the airwaves to transmit calls.

Even if all those factors match, cell phone providers would still need to know dozens of intricate details about switching subscribers' devices that may not be easily accessible to them, such as the cell phone's screen size and roaming authorizations.

"We will on a very rare occasion allow a customer to keep their old phone if they come to us from another carrier," Verizon Wireless spokesman Jeffrey Nelson said. "But we're going to try to talk them out of it, because the phone's not optimized."

Consumer advocates fight back
Despite such arguments, consumer advocates are crying foul, saying carriers should be forced to find ways to guarantee interoperability of phones between networks.

The issue has already won the attention of class-action attorneys, with at least one federal antitrust lawsuit awaiting trial in the U.S. District Court for the Southern District of New York. The complaint accuses the top five U.S. cell phone providers of illegally tying their services to the sale of new phones.

The defendants deny the charges and say they plan a vigorous defense.

Attorneys for the plaintiffs in the lawsuit didn't comment for this story. But in court papers, they argue that handset makers and cell phone carriers have illegally limited competition among themselves by choosing phones from a short list of manufacturers. That's helped shrink the handset equipment market from dozens of major players a decade ago to the 10 that currently sell most of the world's handsets.

That argument resonated with the judge in the case, who in August allowed the lawsuit to proceed to trial. "The fact that new handsets must be marketed through, and are programmed and locked by, the wireless service carrier presents an absolute barrier to entry into the handset market," Judge Denise Cote wrote.

If successful, the suit could force the cell phone industry to revisit its ubiquitous equipment discounts; carriers currently knock about $200 off the price of a $300 phone, said Michael Kende, principal consultant with Analysys.

Carriers first began to install locks in the early 1990s to stop resellers from taking advantage of their subsidies. A few Asian exporters took advantage by buying huge quantities of cheaper phones, then selling them overseas for a profit, according to industry sources.

Now "nearly every manufacturer ships phones locked right on the factory floor," said Keith Nowak, a spokesman for Nokia, the world's largest handset maker.

That can be a pain for cell phone customers when it comes time to change carriers.

For Julians, the San Francisco advertising executive, cell phone porting would have saved her cash and the thumb-numbing exercise of re-entering dozens of contacts or calendar entries into her new phone. She also didn't look forward to mastering a new cell phone's quirks, such as the 17 steps it takes to download a ring tone on her current phone.

To be sure, there are ways around carrier controls, and a small industry has emerged around demand for cracking handset software locks, especially in Europe, where a black market of professional cell phone lock pickers has sprung up. Lock pickers charge about $10 per phone and can be found in back alley shops in places such as Piccadilly Circus.

Cell phone buyers can also venture online, where unlocked phones are widely available. Julians tried this route, figuring the comfort factor of using the same phone was worth the few extra dollars she expected to pay in shipping and handling.

But shopping for cell phones in the open market can lead to sticker shock. Julians said that replacing the phone she purchased through her service provider for the subsidized price of $50 would have cost more than $300 if purchased through an online store.

That's standard in the industry, Nokia's Nowak said. "Most phones that are unlocked are going to be sold at the full retail price," he said.

Analysts said there's little indication that carriers will ever willingly allow widespread cell phone portability. Chief among the reasons is that they would lose a revenue source. Also, it would subvert the carrier's carefully created sales procedures.

"A lot of this has to do with wanting to make sure handset sales are through their own channels," IDC analyst Keith Waryas said. Without such absolute control, carriers lose revenues because they become "nothing more than a pipe provider," he added.

Allowing subscribers to port devices might also lead to quality issues, by allowing phones onto a network that don't necessarily work as well as others. That could lead to customer dissatisfaction, greater churn and a lot less subscriber loyalty, Waryas said.