KEY POINTS:
Telecom could block competition in the mobile market by deliberately making its handsets unusable on Vodafone's network, the Telecommunications Users Association of New Zealand has warned.
Next year Telecom plans to start building a $300 million mobile network using GSM technology - similar to that used by competitor
Vodafone - to handle mobile calling, video and high-speed broadband.
That could mean that changing from Telecom to Vodafone could be as easy as switching the SIM card - the small microchip holding network authentication information.
At the moment the different network technologies mean customers need a new handset to move between Vodafone and Telecom.
But Tuanz head Ernie Newman warned Telecom could lock their handsets when they sold them to stop their use on other networks.
This would undo the effectiveness of number portability - the ability to switch mobile companies and keep the same phone number - in improving competition in the sector.
Number portability was introduced in April after 10 years of pressure from the industry and consumers.
"Having two technologically compatible networks in New Zealand for the first time will be a real boost for competition and we don't want to see the benefits dissipated by anti-competitive dirty tricks," said Newman.
"However, this is dependent on both companies' refraining from locking the handsets at the time of sale to preclude use on other networks."
Tuanz called on Telecom and Vodafone to pledge they would not lock their handsets.
Telecom's Mark Watts did not respond to questions yesterday.
Kursten Shalfoon, Vodafone New Zealand's general manager products and services, said Vodafone would not need to lock its handsets as 95 per cent would not work on Telecom's planned mobile network.
Shalfoon said the frequency - how the mobile device connects to the network - is different to that used by Vodafone's 3G network.
Telecom's mobile service would operate on the 850MHz frequency previously used by the defunct 025 network, he said.
A global telecommunications industry report describes the 850MHz frequency as "not widely used".
However, Shalfoon said devices built for 850MHz network commonly had the capability to roam on the 2100 MHz network but not vice-versa.
He expected 95 per cent of handsets compatible with Telecom's new network to also work on Vodafone's existing GSM network.
Shalfoon said Vodafone would make it clear if its handsets could not be used on Telecom's new network.
In Australia, Vodafone and Telstra charge customers up to $100 to unlock a handset from their network.
Telstra applies "network locking" to its prepaid customers, who are more likely to switch mobile operators than on-account customers signed up to punitive terms and conditions.
Network locking also enables phone companies to reclaim any discounts on handset prices used to attract customers.
"We think the days of super, heavy discounting of handsets are well and truly gone in most countries," Newman said.
Discounting had a place in the early days of cellphones when the cost of buying a handset was prohibitive for consumers, so the companies amortised the cost over a two- or three-year contract, he said.
Since then the cost of handsets had dropped markedly, said Newman, and people now appreciated it was better to pay the true cost of a handset than be locked into a restrictive contract.
"So we actually think handset discounting ought to fast become a thing of the past and people should be paying a fair price for the handset and a fair price for the service."
Newman said Tuanz wanted a commitment from both Vodafone and Telecom that they would make it clear to customers buying handsets when it would not operate on a rival network or was locked to a network.
Despite the introduction of number portability, the two rival mobile phone companies stand accused by the Commerce Commission of stymying competition with heavy early termination penalties and restrictive contracts.
Portability
* Mobile phone companies are warned not to introduce handset locking to cut competition in the market.
* Handset locking stops phone users taking their phone handset with them when switching networks.
* It may become an issue when Telecom builds its new network using similar technology to Vodafone.
* Users currently need to purchase a new phone handset when switching mobile operators.