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Phone-Unlocking Deal Aids Consumers, Preserves Contracts

U.S. wireless carriers agreed to be more transparent about how to unlock phones while preserving their system of contracts and discounts to keep customers loyal.

Under pressure from regulators, Verizon Wireless, AT&T Inc. (T), Sprint Corp. (S) and T-Mobile US Inc. (TMUS) said yesterday they’ll let consumers use smartphones on other networks after contracts expire -- and give them explicit instructions on how to modify, or unlock, their gadgets to do so. They’ll also notify customers when phones are eligible for unlocking.

The mobile-phone companies won’t have to let consumers free up their phones while under contract, unless they pay a termination fee. That keeps in place the model where users buy phones on installment plans or accept two-year subscriptions in exchange for hundreds of dollars in discounts for devices such as Apple Inc’s iPhone.

“It solves the basic problem, which is the lack of transparency,” said Jan Dawson, founder of technology advisory firm Jackdaw Research in Provo, Utah. “You start threatening people with regulation, it really motivates them to figure out how to change their behavior.”

The changes will take effect within a year of formal adoption by members of CTIA-The Wireless Association, Steve Largent, the industry group’s president, said yesterday in a letter to Tom Wheeler, chairman of the U.S. Federal Communications Commission.

“Today’s commitment by wireless providers will provide consumers with more information about when, and how, to move their devices from one network to another compatible network,” Wheeler said in an e-mailed statement yesterday.

Little Effect

Prepaid users, who don’t sign contracts to stay with carriers, can have their devices locked for no longer than a year, according to the agreement.

Since wireless companies use different radio frequencies and network technologies, some phones can’t be switched from one provider to another.

The unlocking accord will have little effect on the major carriers’ customer retention, said James Moorman, an analyst at S&P Capital IQ in New York.

“Generally by the time if you’re unlocking your phone after your two-year contract’s done, in this day and age you might want a new phone anyways,” he said.

Unlocking became a political flashpoint last year, when the Library of Congress declared that using software to break a carrier’s safeguards was a copyright violation. President Barack Obama’s administration joined critics of the library’s decision after more than 114,000 people signed an online petition.

Further Steps?

Gene Sperling, director of the National Economic Council, yesterday praised the carriers’ move as “an important step forward” for consumers. “This issue is about the simple freedom to take your business where you please,” Sperling wrote on the White House blog.

Consumers shouldn’t be at risk for criminal penalties when unlocking smartphones and tablet computers, if not bound by a service agreement, said R. David Edelman, a White House senior adviser, in a blog post in March entitled, “It’s Time to Legalize Cell Phone Unlocking.”

Now that a deal has been reached, T-Mobile, the smallest of the four major U.S. carriers, called for further steps.

“There is additional progress to be made on unlocking, such as the support of a robust secondary market in mobile devices,” Anne Marshall, a spokeswoman for Bellevue, Washington-based T-Mobile, said in an e-mail yesterday. “We will continue working with the FCC to enhance the new policies announced today.”

To contact the reporters on this story: Todd Shields in Washington at tshields3@bloomberg.net; Gerrit De Vynck in Toronto at gdevynck@bloomberg.net

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net

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