Cellphones in the U.S. work on either System for Mobile Communications or Code Division Multiple Access technology. This means your cellphone is built on one technology and is not compatible with networks that use the other technology. Also, when you buy a cellphone, it often comes with pre-installed software to recognize a specific carrier. GSM phones store this information on the subscriber identification module card slot. CDMA carriers program their phones to work on their networks only. In both cases, you can use your phone with the specific provider only. Unlocked phones can recognize the networks of other compatible carriers so you can use them on any compatible network.
Why Carriers Lock Phones
Cellphone companies often subsidize the cost of the phones they sell to subscribers, because doing so entices customers to buy the phone and choose the carrier. To recoup the revenue it loses to subsidize the phones, carriers lock customers into contracts. So, instead of paying several hundred dollars for your new phone, you pay a fraction of the cost. You'll then need to remain with the carrier for the contract period. Also, if someone steals your phone or you break your contract, the wireless carrier can shut your phone off remotely.
If you buy an unlocked phone, you don't need to lock yourself to a contract. You can use your phone on multiple cellular networks as long as the carrier uses the same technology as your phone. Also, unlocked phones are useful if you travel to areas in the country where your current carrier isn't the dominant carrier -- simply switch to the dominant carrier that uses your phone's technology to get better reception.
Most international wireless carriers use the GSM technology. So, if you have an unlocked GSM phone, you might not need to buy a new phone or pay roaming charges, you just need to buy a SIM card for your destination. However, GSM networks operate on one of four frequency bands, and different countries support different bands. So, make sure your phone can operate on the band your destination country uses. You can also buy an unlocked tri-band or quad-band phone; tri-band phones work in most international countries and quad-band phones will work on any frequency.
Savings and Options
You'll pay more upfront because you have to pay the full retail price for unlocked. However, you might get some savings in the long run. For example, you get a pick of networks, so if another compatible carrier offers better rates, you can switch to that carrier. You don't need to worry about early termination fees because you don't have a contract, and you avoid roaming fees when you travel because you can buy a SIM card from a local carrier. You also get more cellphone options because you can select from a range of carriers, distributors and manufacturers instead of just one carrier. For example, you can buy an unlocked iPhone and use it on any GSM network, but, if you don't want to pay more than $600 for your phone, you might opt for a Google Nexus phone.
Disadvantage of Unlocked
The features you have with your current carrier might not work with the new carrier, so conduct thorough research before you switch. For example, your unlocked phone might not be compatible with the bandwidth configurations or settings of the provider you're eying. Also, if you unlock your phone without the help of the carrier, you might need to reapply your code each time there's an update to the software on your phone. Examples such as these might effectively lock you to your current carrier.
Is It Legal Or Not?
Carriers use hidden code to lock phones, and reversal of these codes produces an unlocked phone. Popular consensus is that users should be able to do whatever they want with their phones, including unlock them. Carriers did not like this because this could translate to a lost of business, and in 2013, The Digital Millennium Copyright Act made it illegal to unlock cellphones. But, in Feb. 2014, the US House of Representatives passed the Unlocking Consumer Choice and Wireless Competition Act, making it legal for you to unlock a phone as long as it's fully paid for and, therefore, yours. Providers also can unlock your phone at your request. It remains illegal to unlock phones for bulk resale.