The Prepaid Press - June 15, 2008 - (Page 14)

PREPAID WIRELESS June 15 · 2008 - 14 Handset Trafficking Dealt Blow TracFone Action is Important Milestone By Gene Retske Melinda Harmon of the U.S. District Court for the Southern District of Texas to charges of criminally disobeying the order. This case comes on the heels of a suit by AT&T Mobility, the biggest US wireless company. The suit against alleged handset traffickers was filed February 5, 2008 in the Northern District Court of Texas against Wireless Exclusive USA, LLC, based in Dallas. In its filings, AT&T claimed damages of more than $76 million, and named 50 unknown “John Does” and 50 XyZ Companies, who AT&T said were also involved in the scheme. After years of mounting losses, US cellular companies are finally starting to see some encouraging signs that the war against handset traffickers is turning in their favor. In May, the first significant victory against handset traffickers was claimed by TracFone Wireless with the guilty plea by an international trafficker of prepaid mobile phones, Muhammad Mubashir, 27, of Sugar Land, Tex. Mubashir was accused of trafficking in prepaid mobile phones, and was under a federal court order prohibiting him from continuing to purchase, tamper with or export prepaid mobile phones. Mubashir pleaded guilty before Judge How it Works Handset trafficking exploits the common practice by US cellular companies of subsidizing the price of cellular handsets to capture and hold customers. The usual plan is a contractual arrangement for monthly service for a fixed period of time, usually two years. In exchange for committing to service with one carrier for the length of the contract, the carrier pays a part, or all, of the cost of the handset. Most carriers offer handsets that can be used with their service for free with the commitment. With prepaid wireless, there is usually a minimum purchase of prepaid minutes, but it is often minimal or non-existent. The AT&T Suit The international market for repackaged handsets is very large, and their ubiquitous availability in retail locations makes them tempting targets. AT&T notes in its suit that federal courts have recognized in previous suits by others that this activity violates civil laws. Named in the suit, in addition to Wireless Exclusive, was Moiz Khoja of Dallas, who the filing said was registered to do business in Dallas County under the assumed name of Wireless Exclusive. AT&T said that the practice, which it called “Illicit Bulk Resale Scheme,” resulted in profits for Khoja and other unnamed co-conspirators. AT&T’s suit maintains that this is in violation of trademark law and other statutes, including breach of contract, false advertising, unfair competition, tortuous interference, civil conspiracy and unjust enrichment. AT&T also notes that TracFone, T-Mobile, Nokia and Virgin have all filed similar suits in federal courts across the country. AT&T told the court that it was losing millions of dollars, and asked the court to award it damages of $76 million. AT&T is represented by James Baldinger of Palm Beach-based Carlton Fields, who also represented TracFone in other cases in recent months against wireless phone hackers, and is working with federal law enforcement officials on the problem. Carlton Fields said that it was also pursuing the matter with law enforcement officials. The TracFone Case TracFone said its case was an important development in the industry’s battle against the bulk prepaid phone purchasing scheme throughout the U.S. because the court was putting some teeth into the prohibition. “TracFone will continue to aggressively pursue those who participate in prepaid mobile phone trafficking because it undermines our ability to provide an affordable, quality mobile phone to our customers,” said F.J. Pollak, president and CEO of TracFone Wireless Inc., based in Miami. Prepaid phone trafficking is a nationwide concern for the wireless industry because it has the potential to drive up costs to consumers, according to TracFone. The company said that to make wireless service affordable and accessible for everyone, it heavily discounts the retail price of its phones, but expects to recoup its investment by providing service to customers through the sale of airtime cards and other services. “Honest consumers are harmed when they purchase these altered phones sold as ‘new.’ In most cases, the phones don’t work as they should, and the manufacturer warranty is voided,” said James B. Baldinger, an attorney with Carlton Fields, the firm representing TracFone. Schemes like those organized by Mubashir exist across the country and involve groups of Handset trafficking exploits the common practice by US cellular companies of subsidizing the price of cellular handsets to capture and hold customers. This subsidy makes business sense for a prepaid carrier because of the acquisition cost of a new customer. The handsets used for prepaid cost the carrier around $50, maybe less if they are refurbished or lower function. The trafficker has two practical hurtles to overcome. First, the handsets are locked so that they will only work with that carrier’s service. Locking stops someone from buying a handset, then inserting another carrier’s SIM card in it. To make the handset work with a carrier overseas, where they are usually shipped and sold, the handset must be unlocked. The process can be as simple as entering a series of codes, or as complex as requiring a PC to finish the procedure. The AT&T suit alleges that the defendants unlocked the handsets in violation of the license agreement that is attached to the retail packaging. Since the handsets have the inherent capability of operating on non-US cellular systems, they can be bought for very cheap prices in the US, exported, and sold at a significant markup. The second issue is how to buy enough handsets to be worthwhile. The practice is relatively unsophisticated, and uses labor intensive brute force methods. The companies enlist “runners” by advertising on the Internet. These runners then go to stores like Best Buy, Sam’s, Target, Wal-Mart and other retail locations. They buy the prepaid handsets, which are intended to be used to access, for example, AT&T’s GoPhone service, or TracFone. After buying the handsets at a retail location, they are then taken to a central location where the handsets are removed from the retail packaging, and logos and other distinguishing marks removed. Finally, they are unlocked so they can be used on other networks and shipped overseas, where they are marked up and sold at often large profit margins. TracFone said its case was an important development in the industry’s battle against the bulk prepaid phone purchasing scheme throughout the U.S…. “runners” who purchase prepaid mobile phones from major retail outlets, according to the release. TracFone said that the phones are then passed to middlemen who alter or remove the prepaid software and resell the altered phones as “new” at a significant profit to unsuspecting customers domestically and abroad in Latin America, Asia and the Middle East. “Prepaid mobile phone traffickers are not legitimate entrepreneurs,” said Baldinger. “We contend they are engaging in unlawful activity that harms American businesses and consumers. The fact that one of them is going to jail is a wake-up call for anyone else engaging in this activity.” http://www.frecuenciaevents.com http://www.frecuenciaevents.com

Table of Contents Feed for the Digital Edition of The Prepaid Press - June 15, 2008

The Prepaid Press - June 15, 2008 Contents The Retske Report: The More Things Change… Regulatory Rundown: June 2008 5 Minutes With Harvey Caron VP/Marketing Director, Pentagon Graphics TPPExpo’08 Spotlight Handset Trafficking Dealt Blow Prepaid Wireless Roundup Virgin Mobile to Use Platform-A Sprint Reports Lower Wireless Revenues Virgin Mobile Adds Samsung to Offerings States Considering Photo ID for Prepaid Wireless Prepaid Reviews Podcast Includes TPP Editor Prepaid Wireless in Brief Managing Equipment and Capacity Upgrades Atlantax Systems and TMI Form Alliance The Legal Line Spot Rates FTC Halts Bogus Prepaid Phone Card Claims Titan Global Re-Appoints Kurt Jensen as Pres/CEO Calling Cards in Brief TX AG Files Suit Against Calling Card Company Startec Moves to PhoenixSoft Cirrus Ringplus.net Offers Free Calls Interchange Fee War Begins edo Interactive Launches Networking Card MasterCard Uses CSC Platform nFinanSe Gets $15 Million Line of Credit Travelex Cash Passport Debuts at US Retail Stores CardEx Offers Cost-Free Gift Cards Payments in Brief Altair and Blueberry Launch a Prepaid Card for Moms FrontStream Acquires Direct Technology Innovations New Etelcharge Version Goes Live Prepaid 101: POSA Retail Focus in Brief NRF Says Retailers Fighting Organized Crime Blackhawk Announces Annual Hawk Awards NRF Says Retail Sales Showed Resiliency in April TravelCenters Adopts Coinstar Pay As You Go Marriott Offers a $25 Visa Gift Card NRF Favors Law Protecting Retailers from Lawsuits Starbucks Card Members Get Free AT&T Wireless Wi-Fi Our Advertisers Classifieds Contact Us

The Prepaid Press - June 15, 2008

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