Black Market For Low-cost Phones Flourishing

[Honest 836]

Black market for low-cost phones flourishing

14 Jul, 2008, 0203 hrs IST, ET

MIAMI: For less than $15, anyone can buy a cell phone loaded with minutes. They can buy more as you go whenever those minutes run out. Best of all, they aren't locked into a long-term contract.

But in South Florida, New York, California, Georgia, Texas and elsewhere, traffickers have figured out they can make big profits by purchasing thousands of these low-cost phones and tweaking the software so that calls can be made on any cell network. The altered phones are then sold all over the world _ costing US phone companies tens of millions of dollars.

Some traffickers employ dozens of people full-time as ``runners'' to buy the phones at retail stores so they can later be hacked into and resold. The problem for the phone companies is that they often sell the phones at a loss, instead making their money when customers have to buy additional minutes from them _ a guaranteed profit once the phone is sold. But the phone companies have no guarantee that customers will buy minutes from them after the phones are hacked or shipped to a far-off country.

It's technically not illegal to unlock the software on personal cell phones _ but the companies are hoping to put a stop to traffickers that they say are siphoning away profits. Led by Miami-based TracFone Wireless Inc., makers of the low-cost prepaid cell phones are suing traffickers in federal courts around the United States. One such lawsuit resulted in a criminal conviction in Houston when a man disobeyed a court order by refusing to stop selling the phones.

``There is a lot of profit in it,'' said James Baldinger, a West Palm Beach attorney with the Carlton Fields firm who represents TracFone. ``Even as we continue to shut people down, we do find there are people still engaged in it. TracFone is going to keep going after them.''

These phones are typically sold by traffickers for between $40 and $60 above the discounted TracFone price _ and they are frequently marketed in lots of 10,000 or more. Web sites catering to these dealers boast about having huge numbers of unlocked cell phones.

TracFone has filed 39 lawsuits in recent months _ more than half of them in South Florida _ seeking to stop companies and individuals from trafficking in its phones. Similar lawsuits have been filed by AT&T, Nokia Corp., Virgin Mobile USA Inc. and Motorola Inc.

TracFone and the others argue that federal laws protect their trademarks and copyrighted software. They say the phones must be used with minutes bought from the company that sold the phones. TracFone and other companies lose customers _ and therefore profits _ when people buy minutes from other cell phone companies.

Not everyone involved believes it is wrong. A company called Incomtel that bills itself as ``cellular suppliers to the world'' was among those recently sued by TracFone. Its lawyers argued in court that it's perfectly legal to buy phones from stores such as Wal-Mart, CVS and Target and modify them to work on any cell phone system.

The company contended in court documents that because the phones made by firms such as Motorola and Nokia are purchased on the open market and are repackaged for resale, Incomtel is under no obligations to TracFone.

``If the phone is a Motorola phone, it is operated by Motorola software,'' the company said. ``The fact that TracFone, on its phones, may lock the code and making some minor branding modifications does not render the Motorola or Nokia software a property of TracFone.''

So far, TracFone and the other companies have been winning more than losing. Tracfone has obtained more than 15 court orders halting the unlocking and resale of its phones, and has been awarded more than $4 million in damages.

One man could be headed to prison in the first case nationally of its kind.

Muhammed Mubashir, 27, pleaded guilty in May to criminal contempt charges for disobeying a federal judge's order in Houston that he stop trafficking in Virgin Mobile phones. A separate order against Mubashir involved the seizure in 2007 of 1,300 TracFones he was sending to Hong Kong. It was later learned that he sold at least 9,000 TracFones in this way.

It's up to a federal judge to decide if Mubashir should do prison time, but it's clear that TracFone wants an example set. Sentencing is set for Aug. 22.