Kiss your cell phone carrier good-bye

(Fortune Magazine) -- You've probably been hearing a lot about unlocked mobile phones lately, especially in the context of the new Apple cell phone and AT&T, the device's sole service provider. Most iPhone owners seem to love the sleek device, but are less than thrilled with AT&T's slow network.

Enter some crafty tech geeks. They've found some creative ways to free, or unlock, the iPhone from AT&T (Charts, Fortune 500) so that it works on other networks too. These hackers, including a New Jersey teenager who used a soldering iron to crack the iPhone, have been grabbing headlines lately in part because it's not yet clear whether their actions are legal (by unlocking their iPhones, do users owe AT&T a hefty termination fee?).

The only way to free the new Apple iPhone from AT&T's service is to hack into it. Other phones are already sold 'unlocked,' which lets you pick a carrier and a more flexible rate plan.

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Guess what? Getting a cell phone to work on other carrier networks isn't that hard, nor do you have to be accused of thievery to get one. In fact, lots of phones are available unlocked - with the wireless industry's blessing.

You can buy one through an independent retailer - a mobile phone manufacturer like Nokia (Charts) or an online store that specializes in such devices - and then sign up for month-to-month service with a mobile operator of your choice.

Or you can ask your carrier to unlock your existing phone once your contract has ended. Most will agree to do it.

"We do unlock phones for people who want to do that," says Mark Siegel, an AT&T spokesperson. "We try to have a consumer friendly approach to it."

Unlocked phones have several advantages: You're not enslaved to a lengthy contract, and you can use them on multiple networks, including many of those found overseas. With a locked phone, however, you're stuck with one network and pricey roaming fees when traveling abroad.

Nicolas Bernadi, a Palo Alto-based managing director at European gourmet food manufacturer Frial, travels abroad about once a month and pays roaming charges of about $1 per minute with a locked phone.

"It's ridiculous," says Bernadi.

Unlocking a phone is easy, assuming your existing carrier agrees to do it. A rep simply punches in an electronic code that "frees" your device from the company's network.

Sound too good to be true? Well, there are a few catches: Not all phones, including some of the most popular ones like the iPhone, are sold unlocked (leaving it up to hackers to break the carrier's grip). And unlocked phones, at least the ones you buy directly from a carrier or an online retailer, don't come with those generous subsidies that can drive the price of a phone down to practically nothing.

Nokia's unlocked phones, for instance, cost a much as $750. The Treo 680 smartphone, which sells for $150 with a two-year wireless plan from AT&T, costs $400 if bought unlocked from its maker, Palm (Charts).

Similarly, the RAZR V3 from Motorola (Charts, Fortune 500) will set you back $170 for an unlocked version, compared to just $50 if you sign up with T-Mobile.

What's more, even though your phone now works on multiple networks, you'll still need to sign up with a carrier. The good news is, you can get a month-to-month contract, which can be cancelled at any time, with rates similar to standard two-year contracts.

But there's another drawback: To work, an unlocked phone has to run on a wireless standard known as GSM. While 85 percent of the world's mobile phones use GSM, that's not the case in the United States, where two out of the four biggest carriers, Verizon Wireless and Sprint Nextel (Charts, Fortune 500) use a competing wireless standard known as CDMA.

Because of the higher price and the technical limits, unlocked phones are little more than a novelty in the United States. In western Europe and other parts or the world, where unlocked phones are hugely popular, consumers aren't accustomed to getting their phones dirt-cheap.

"People value their freedom in principle," says Roger Kay, president of Endpoint Technologies, a Wayland, Mass.-based research firm. "But when you put it up against hard dollars, they'd rather take their enslavement."

Some analysts had speculated that Apple's entry into the cell phone market would mark a turning point for the wireless industry - and pave the way for more unlocked devices. If consumers were willing to shell out as much as $599 for an iPhone, the thinking went, perhaps the era of generous carrier subsidies would be over.

Or maybe not. Apple (Charts, Fortune 500) CEO Steve Jobs earlier this month slashed the price of the $599 model by one-third and discontinued the $499 version altogether, suggesting that consumers overall aren't ready to pay top dollar for their mobile phones.

Apparently, Americans still want a deal.