The thing that attracts a lot of potential TracFone customers to the cheap, pre-paid wireless service is the fact that they can get cheap or free handsets to use with TracFone's decent rates for pre-paid wireless minutes. TracFone subsidizes the cost of these handsets to make them more affordable - under the presumption that the customer will provide revenue back to TracFone by purchasing pre-paid minutes.

Like all things American, a group of handset resellers realized that they could make money by ripping off TracFone. Resellers could purchase a subsidized TracFone handset on the cheap and then hack the handset (unlock/reflash) it to work without any activation on non-TracFone networks. The unlocked handsets would then be sold overseas as brand-new handsets to unsuspecting customers for a significant profit.

TracFone implements purchase limits (2 per person) at retail stores to ensure that their mobile phones are purchased for legitimate means. But, these resellers use "runners" to buy TracFone handsets from different stores, going as far as to buy the phones from multiple cashiers at a particular retail location and by dressing in disguise.

As you might expect, this was a huge problem for TracFone. As the nation's No. 6 wireless carrier, TracFone was seeing a lot of their subsidized handsets never returning any revenue through purchases of pre-paid minutes - and TracFone took a prominent reseller to court.

And, today, a federal district court judge ruled in favor of TracFone and awarded the MVNO a $1 million judgment. The ruling prohibits defendant James Ray Thomas, Jr. (a/k/a Jim Thomas Hollis a/k/a James L. Ford) and his co-conspirators from buying TracFones in bulk and hacking (unlocking/reflashing) them for resale purposes - effectively killing Jimmy's "business model." The problem, however, is more widespread than this one case. TracFone is in the process of taking a group of 80 defendants to court over this reselling issue.

If there's a loophole, there's some shady character out there willing to exploit it. So it should be no surprise that people are making money by cutting TracFone out of its own business. The good news is that TracFone has come out on top on this particular case. And, the judgment is a positive sign for the rest of the US prepaid landscape. TracFone isn't the only pre-paid operator to suffer loses from illegal reselling of hansets.

I'm personally all for TracFone shutting down these "resellers" for good - there's even FBI-speculation that some resellers are using proceeds to fund terrorist activities…

[Via: HotCellularPhone]

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