A subsidy lock is a physical feature on a mobile telephone that restricts which SIM cards it will work with. Though there are other names for the technology, the subsidy lock usually refers to a phone being restricted to operating on a particular network. This is because such phones are usually sold at a low price, with the network paying a subsidy to the manufacturer.
The subsidy lock works with the GSM communications system, the most common type of mobile telephone around the world. It restricts the SIM cards that will work in the phone. The SIM card connects the phone to a particular network, and without it, the phone cannot make or receive calls, with the exception of emergency services calls in some countries. These restrictions can cover the country where the SIM card comes from, the network providing the SIM card, or both. It's also possible to restrict a phone to a single SIM card.
Usually the phrase "subsidy lock" refers to a restriction on a network. This is because many networks, particularly those that sell phones themselves, will pay a subsidy to manufacturers, meaning the purchase price for the consumer is lower than it would otherwise be, and may even be below cost price. In return for this subsidy, the network will attempt to avoid the consumer using it with another network. While this can sometimes be achieved by a mandatory service agreement, a subsidy lock is needed to stop a pay-as-you-go customer from getting the phone cheaply and then taking his business elsewhere.
In most cases, a subsidy lock can be removed by typing in a code. Some networks will provide this code in return for a fee. This fee is designed to cover the loss of income from future phone use. In some cases, the algorithm that converts the unique identity code of the phone, known as the IMEI number, to the unlock code has been leaked or stolen. This allows independent companies to provide unlock codes to phone users at a lower price than the network charges.
The legal position on subsidy locks and unlocking varies across different countries. In the United States, as of 2010, phone unlocking was specifically exempted from the Digital Millennium Copyright Act. This means that it is legal to unlock a phone and run it on any network. Some networks warn that doing so voids any warranty on the handset. It's important to note that although a contract customer may be able to legally unlock a phone, he will usually still be required to pay for the service from the original provider for the duration of the contract.