Saturday, December 09, 2006

Wireless firms say prepaid phone prices may go up

That $20 cellphone at Wal-Mart may soon cost a lot more.

Prepaid wireless companies say they may have to sharply raise the prices of their discount cellphones after a federal ruling that hobbles their ability to crack down on a rampant foreign black market in the devices.

Such a price increase could damage the prepaid wireless business, says Ovum analyst Roger Entner. Prepaid has become the cellphone industry's fastest-growing segment by targeting lower-income consumers who often can't afford traditional plans.

"It could end up hurting consumers if prepaid wireless service becomes less affordable," says Jayne Wallace of Virgin Mobile, the No. 2 prepaid company.

This week, TracFone, the No. 1 prepaid provider, sued to overturn the Library of Congress's Nov. 22 decision granting new exemptions to copyright law. Its ruling lets consumers remove software locks that prevent cellphones from being used on another carrier's network. The effect on carriers such as Sprint and Cingular is minimal, because subscribers get a free or discounted phone when they sign a two-year contract.

But prepaid companies say the ruling has weakened their ability to sue members of roving gangs that buy truckloads of phones, remove the software and sell them for mark-ups of 100% or more in markets such as South America and Hong Kong.

The black market is possible because prepaid plans require no contracts. Consumers simply buy the phones for as little as $15 in stores and pay in advance for cellphone service by using cards to load in airtime.

Prepaid companies typically pay $60 to $80 for the handsets, recouping their losses when consumers buy airtime.

But when resellers scoop up the devices and alter them, the providers lose their entire investment. TracFone estimates that more than 800,000 of its phones have been resold this way, according to a court filing in a federal criminal case, costing it tens of millions of dollars.

To combat the problem, retailers now limit prepaid phone purchases to three at a time. TracFone and Virgin Mobile have sued dozens of resellers, winning several cases.

While they can no longer rely on copyright law, prepaid companies say they still have other legal claims, noting the sales violate their trademarks. But in a government filing, TracFone called the copyright law a "significant tool" without which it would have to charge full price for the phones. TracFone lawyer James Baldinger says raising prices is an option, but the company is also working on technology to prevent the software tampering.

Frank Killgore, a lawyer for Clinton Riedeman of Winter Park, Fla., sued by TracFone for reselling thousands of handsets, says the ruling may prompt his client to re-examine his decision not to fight the claims.

In e-mails, contained in a TracFone court filing, Riedeman urged people he enlisted to buy phones to travel state-to-state and "hit 40-50 stores every day."

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