Goodbye To Freebies, Hello To Freedom

Cell-phone customers who are willing to pay more can switch carries at will

Ricky Davis is the kind of customer wireless carriers hate. On a recent visit to New York from Sydney, the film production assistant dropped into a wireless store and, bypassing phones with flashy names like BlackJack, RAZR, and Pearl, asked for a model for her husband that could be used with any number of service plans—just like her own $400 Nokia N70, purchased in Australia (NOK ). Davis, 51, enjoys the freedom to travel almost anywhere without signing up for a two-year plan with one carrier that forces her to pay huge roaming charges on the road. "They factor the cost of the phone into the plan anyway, so you might as well just buy the phone you want," Davis says.

Nokia, Samsung, and other cell-phone makers wish the big U.S. phone companies felt the same way. They complain that some of their coolest and most profitable designs never see the light of day because Cingular, T-Mobile (DT ), and others keep tight control over which products they feature and what software can be placed on the phones they sell. In exchange for getting cheap phones subsidized by carriers—as much as $400 below cost—consumers usually forfeit the right to take that phone with them if they switch carriers.

But the era of the freebie phone may be coming to an end. In late Novem ber the U.S. copyright office ruled that it is not illegal for consumers to "unlock" cell phones they purchase from a particular carrier. The three-year exemption from potential wireless industry lawsuits strengthens the hand of Nokia and other manufacturers, which have begun quietly opening flagship stores in New York, Chicago, and elsewhere to sell phones like Davis' N70. Such moves risk alienating the wireless outfits, but cell-phone makers see the market shifting. Fewer than 5% of the 163 million handsets sold in the U.S. this year were unlocked versions. But analysts believe that could jump sharply in 2007 if Apple Computer Inc. (AAPL ), as expected, soon announces an iPod-based phone with an unlocked option.

Market dynamics also are forcing change. Much of the growth for Nokia, Motorola (MOT ), and Samsung is coming in markets like China and India. But the cheap phones they sell there are less profitable than the glitzy gizmos that browse the Web, take high-resolution photos, and play music.

Even with unlocked phones, there's less freedom in the U.S. Unlike in Europe and other regions, there are two types of cellular technology in America. Cingular and T-Mobile use a global standard called GSM; to use their phones customers plug in SIM cards that store information about subscribers. Verizon Communications (VZ ) and Sprint phones don't have cards because they use a different standard based on chips licensed or sold by Qualcomm Inc. (QCOM )

Every phone can be unlocked, but because the two standards are incompatible, a customer who buys a Palm (PALM ) Treo from Verizon still could not get it to work with the Cingular plan. Even when you buy an unlocked phone, you need to buy a wireless plan from a carrier. You aren't forced into a contract, though, and you don't have to pay a termination fee when you leave. Things could become yet more confusing with the launch next year of Sprint's Nextel Corp.'s (S ) WiMAX wireless network. Using that Internet-based technology, all sorts of WiMAX devices may be able to make cheap voice-over-Internet calls.

If unlocked phones do take off, carriers would benefit by not paying subsidies, but they would be forced to compete to offer the best services and fastest Web connections. That may spark price wars.

Handset makers can't afford to cut out the carriers entirely. Even as Samsung makes the $1,200 Serene phone for Bang & Olufsen and Nokia sells its $650 steel 8801 phone through Neiman Marcus, they hope to get more shelf space at Cingular and Verizon stores. The carriers ultimately sell mobile Web services and are trying to lock in customers by adding TV programming and YouTube videos. "It's really hard to compete with that, no matter who you are," says Joe Fabris, director of wireless solutions at Palm Inc. (PALM ) That won't stop manufacturers from trying, though.

By Cliff Edwards, with Sonal Rupani in New York

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