Unlocking the Mysteries of Locked Cellphones

From the moment of its debut, the Apple iPhone has attracted enormous attention. Its biggest impact may go beyond the consumer electronics market, however, as the iPhone has forced politicians and regulators to confront some uncomfortable policy challenges.

When the iPhone hit the U.S. market in late June, Canadians could not help but notice that it was not available within Canada (there is still no word on when that might happen), that Rogers was the only Canadian carrier capable of offering it (raising questions about the lack of competition in the Canadian market), and that no major Canadian wireless carrier provides consumers with data plans that are remotely comparable to AT&T's offer of unlimited data for the iPhone US$20 per month.

These competition and pricing concerns remain unresolved, yet a new policy issue has burst onto the scene in recent weeks.  The iPhone, like many cellphones in North America, is "locked" to a single carrier.  Consumers who want the iPhone must use AT&T since the device contains technical limitations that render it difficult to use on other networks.  These limitations are artificial in the sense that there are otherwise no impediments for an iPhone to run on a competing U.S. network such as T-Mobile, a compatible European or Asian network, or on the Rogers network in Canada.

Locked cellphones have become common in North America as carriers claim that they sell "subsidized" phones in return for an exclusive commitment and long-term contract from consumers.  While many consumers may like the opportunity to purchase a phone for a fraction of the full retail price, others would presumably prefer the freedom of an "unlocked" cellphone that would allow them to easily switch between carriers.

The freedom provided by unlocked cellphones is particularly useful for people who travel, since they can avoid roaming fees by converting their phone into a local phone in most countries by simply inserting a local SIM card.  This approach is standard in Europe and Asia, where consumers would not tolerate a market comprised solely of locked cellphones.

While the iPhone may be locked to AT&T, several consumers, including a New Jersey teenager, have uncovered how to unlock their phones.  This has unleashed a legal battle pitting companies anxious to offer unlocked versions of the iPhone against AT&T, which has threatened to sue anyone offering unlocking services.

From a policy perspective, it is readily apparent that locked cellphones undermine efforts to encourage greater competition in the marketplace.  Both the U.S. and Canada have mandated wireless number portability, which is designed to allow consumers to switch carriers without being forced to change their phone number.  However, locked cellphones run counter to that policy by requiring consumers to fork out hundreds of dollars on a new phone to make the change.

Unlocking cellphones also raises some interesting legal issues as consumers ask whether the practice of unlocking cellphones is legal.  In certain respects, this is an odd question to even have to ask – no one would ever question whether consumers have the right to tinker with their car or to use the same television if they switch providers from cable to satellite, yet the telecom industry has somehow convinced the public that unlocking their phones – consumers' own property – is wrong.

Indeed, earlier this year a Telus executive boldly claimed that "unlocking a cellphone is copyright infringement. When you buy a handset from a carrier, it has programming on the phone. It's a copyright of the manufacturer."  The Telus position is almost certainly incorrect under current Canadian law, though that could change if the government goes ahead with planned reforms that mirror the law in the United States.

The U.S. situation is far more complicated since they have laws that prohibit picking a digital lock such as a cellphone lock.  Last year, the U.S. created an exemption to allow consumers to legally unlock their cellphones, yet the provision seemingly does not allow a company to offer the service of unlocking cellphones.  In other words, consumers can do it, but they're on their own.  

While the U.S. may face renewed pressure to remove this impediment, new Industry Minister Jim Prentice will confront the issue as he addresses telecom policy reform.  If Canadians are to enjoy the full benefit of competition and the products they purchase, Prentice should use the upcoming spectrum auction to reserve some space that welcomes only "open and interoperable" devices that are not locked to any single carrier and ensure that the law clearly reflect Canadians' right to unlock phones without legal risk.