Some cell phones are designed to use a Subscriber Identification Module (SIM) card, or microchip that stores subscriber data. The SIM card is issued by a carrier and provides cell service by activating any phone into which it is inserted. A locked phone, however, will only recognize a SIM card from a particular carrier. If the cell phone is unlocked, it will recognize a SIM card from any carrier. The "lock" is a software setting that keeps the cell phone "loyal" to one carrier.

In areas like the United States where carriers offer free or deeply discounted phones with cell plans, the phones are commonly locked so that they will not work with other carriers. Carriers claim this is necessary to subsidize the cost of the phones. After a period of time, a carrier might agree to unlock the phone upon request, perhaps charging a fee. However, due to proprietary settings sometimes installed in locked handsets, the phones don't always function correctly with other carriers, even once unlocked.

From the viewpoint of the consumer, the practice of carriers locking phones and using proprietary settings defeats many of the benefits of SIM handsets. Complaints led to a class action suit filed in California in June 2004 by American watchdog group Foundation for Taxpayer and Consumer Rights (FTCR). Ideally phones should be left unlocked, or at least unlocked after the initial contract expires.

One way to get an unlocked phone without proprietary settings is to buy it new from a third party vendor in its original, unlocked state. The downside is that the price is commonly close to full retail. Some consumers might find it tough to dish out big bucks for a phone that they can get for free with a plan. The advantage is that the third party unlocked phone should work equally well with any carrier that uses SIM cards.

Unlocked cell phones are in such demand that third party services will unlock your cell phone for a fee. This doesn't guarantee the phone will always work correctly, as proprietary settings might remain. There are also hacking instructions online to unlock many models of phones, but a phone that is unlocked improperly can be rendered inoperable.

Carriers operating on the GSM network use SIM cards. In the United Sates, this includes Cingular Wireless, now one with AT&T Wireless, and T-Mobile. Carriers that use the competing CDMA network do not yet use card-enabled phones. These carriers include Sprint PCS, Verizon and Virgin Mobile. The CDMA equivalent of the SIM card — the R-UIM — will be used by these carriers in the future. R-UIM cards are already in use in some parts of Asia.