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European mobile operators are painfully trying to cut their ties with the subsidized handset model, but they will not get the help of the courts, at least in France. Disruptive provider Free has lost its case to get rival SFR's subsidies declared illegal, in a judgement which could set an important precedent for the European industry as a whole.

Free, which has sparked a price war with the launch of its mobile services, was seeking €29m in damages from the second French cellco, Vivendi's SFR, for the "unfair and misleading practice" of selling subsidized phones, saying these should be classed as consumer credit services. However, it has been ordered by a Paris court to pay €300,000 for slander instead.

Had Free succeeded, it would have rocked the French mobile sector, and other markets around Europe which remain heavily reliant on subsidies to attract customers, then locking them into a one- or two-year contract to recoup the upfront cost of the device. European courts have already restricted cellcos' ability to tie customers to contracts of over 24 months and these regulations are likely to tighten further, making the subsidy model even less attractive.

However, attempts to axe subsidies and lure users in other ways - with low monthly fees, added value services or financing schemes - have seen mixed success. In Spain, Telefonica and Vodafone both lost customers when they took this route and were forced to modify their non-subsidy strategies.

Although Free's case was specific to one competitor, and to rules about providing consumers with information about credit services, it had clear implications for the broader practice of subsidizing phones. A strong ruling in Free's favour would have been another blow to its larger, but slower moving, rivals in the short term, but could also have helped accelerate the shift away from subsidies around Europe. In France, 70% of mobile customers have contracts linked to subsidized handsets. Free competes with a prepaid model, and also offers phone loans, though only 5% of its customers take this option.

When it launched its lawsuit last May, Free claimed SFR's contracts disguised the true cost of the handset and forced them into long contracts. It argued that such deals, linking subsidies to a contract, should follow the same regulations as other financial services. However, the court disagreed that SFR's practices constitute consumer credit and said that the information SFR provides to its subscribers is "pertinent, simple, readable and understandable".

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