Mobiles: Customer Lock-In

Various forms of lock-in may be used by mobile operators which may not be anti-competitive in some countries or situations. The practices have to be seen in the context of the prevalent use of handset subsidies (which have to be recovered) to promote adoption, high penetration rates (so that growth is sought by taking customers from other operators) and high churn rates (as customers switch operators to get better phones and deals).

Typically, operators recover mobile handset-subsidies over time through, say, two-year contracts with customers. This has worked well for post-paid plans where customers can be billed at a fixed address. If customers wish to terminate their contracts early, there will be an exit fee to ensure all costs are recovered. If the exit fees are any higher, they may be dubious lock-in devices.

Pre-pay mobile customers do not have contracts but re-charge the credit on their phones in small increments in advance of use. They tend to pay more for calls but benefit from budget certainty.

In the case of both types of customer, operators may lock the subscriber identification module (SIM) card in the phone. The SIM Lock was designed as both a theft deterrent and a user identity tool. However, locking the SIM card in the handset and preventing its replacement restricted customers from changing service providers. Even though the SIM card could technically be “unlocked,” service providers generally imposed significant charges for the SIM override service, effectively deterring customer mobility.

European Community blocks locking

 On May 30, 1996, the EC’s Director-General for Competition informed handset manufacturers and network operators that the EC considered the SIM card lock to have anti-competitive effects. After further correspondence and consultation, the manufacturers agreed to modify the SIM Lock feature in their mobile phones to enable “unlocking.” Service providers were obliged to make full disclosure to customers regarding the SIM Lock feature. In addition, they were required to disclose (1) the amount of the subsidy, (2) the time and the commercial terms it would take to recover the cost of subsidized phones, and (3) how the subsidy could restrict the customer’s ability to unlock the SIM Lock feature. Service providers were allowed to keep the SIM cards locked in the handsets they sold until the subsidies they had provided were recovered.

Without SIM a lock, customers can use more than one SIM card with a mobile phone (dual SIM use) to use the operator providing the lowest charge for a particular call. Oftel research found users prepared to manually change their SIM cards for 50% to 75% of their calls and that without SIM-locking the UK could see dual use taken-up by 15% of all mobile users [1].  

With dual SIM use, there is less incentive to switch between mobile providers (unless this comes with a new, subsidised mobile phone) and less demand for mobile number portability (MNP).  

Customers are sometimes sophisticated enough to pursue jailbreaking (hacking a smart phone’s operating system to run any app on the phone they choose). Apple attempted to use the Digital Millennium Copyright Act (DMCA) to stop jailbreaking [2]. The DMCA dictates “no person shall circumvent a technological measure that effectively controls access to a work protected under this title.” Apple’s claim that the DMCA protected the copyrighted encryption built into its bootloader on the iPhone operating system was rejected by the US Copyright Office in July 2010: “while a copyright owner might try to restrict the programs that can be run on a particular operating system, copyright law is not the vehicle for imposition of such restrictions.” This does not mean Apple has to allow jail breaking, only that it makes it lawful to circumvent controls designed to block jailbreaking in the USA.

ENDNOTES

 [1] Oftel (2001) Use of multiple SIM cards in mobile phones by consumers in Finland, Italy and Portugal

[2]   http://www.wired.com/threatlevel/2010/07/feds-ok-iphone-jailbreaking/ Accessed 26 August 2011

 

Learn More