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Verizon’s Doubling of Early Cancel Fee ‘Good for Consumers’

Phillip Dampier December 21, 2009 Competition, Public Policy & Gov't, Verizon, Video, Wireless Broadband 11 Comments

Verizon Wireless has defended their decision to double the early cancellation fee (ETF) for consumers purchasing “smartphones” and netbooks from the wireless carrier.  In a letter from Kathleen Grillo, Senior Vice President of Federal Regulatory Affairs, Verizon claims the new $350 fee is justified and actually benefits consumers by providing them with a substantial discount on the cost of the equipment they might not otherwise be able to afford.

“The higher [cancel fee] associated with Advanced Devices (click link to see a list of impacted equipment) reflects the higher costs associated with offering those devices to consumers at attractive prices, the costs and risks of investing in the broadband network to support these devices, and other costs and risks,” Grillo wrote as part of a 77-page submission to the Federal Communications Commission, which demanded an explanation for the price increase.

Grillo claims Verizon’s fees are actually good for consumers:

Verizon Wireless’ term contracts with ETFs promote consumer choice and broadband deployment. This pricing structure enables Verizon Wireless to offer wireless devices at a substantial discount from their full retail price. By reducing up-front costs to consumers, this pricing lowers the barriers to consumers to obtaining mobile broadband devices. It thus enables many more consumers, including those of more limited means, access to a range of exciting, state of the art broadband services and capabilities. The company’s pricing structure therefore promotes the national goal of fostering the greater adoption and use of mobile broadband services. At the same time, consumers are protected by Verizon Wireless’ detailed disclosure practices described in this response, by the Worry Free Guarantee, which allows customers to terminate within 30 days of activation without an ETF, and by the monthly reduction in the ETF amount.

Grillo claims Verizon customers can also purchase a phone at the retail price and avoid a service contract.  Verizon Wireless, for example, charges contract customers $199.99 for the Motorola Droid.  But customers who do not want a contract can purchase the phone from Verizon for $559.99.

In North America, most major cell phone companies subsidize the cost of wireless handsets and make up the difference over the life of a typical two-year service contract.  Cell phone companies claim consumers benefit from the arrangement because they are able to acquire a new phone every two years at a substantial discount.  Some consumer advocates and members of Congress disagree, suggesting carriers more than earn back the cost of the subsidized phone over the life of the contract.  Although customers purchasing a retail-priced phone don’t have to worry about a two year contract, they pay artificially higher prices for service plans designed to recoup the costs from those who did take discounted phones.  The result is a strong incentive to commit to a contract and take the phone, since you will essentially be paying for it anyway.

The Government Accountability Office found early termination fees to be among the top four consumer complaints filed with the FCC about wireless carriers.  Sen. Amy Klobuchar (D-Minnesota) re-introduced legislation December 3rd to try and limit early termination fees.

Senator Amy Klobuchar

“Changing your wireless provider shouldn’t break the bank,” Klobuchar said in a Dec. 3 statement. “Forcing consumers to pay outrageous fees bearing little to no relation to the cost of their handset devices is anti-consumer and anti-competitive.”

The Cell Phone Early Termination Fee, Transparency and Fairness Act would prevent wireless carriers from charging an ETF that is higher than the discount on the cell phone that the company offers consumers for entering into a multi-year contract. For example, if a wireless consumer enters into a two-year contract and receives a $150 discount with the contract, the ETF cannot exceed $150.

The legislation would also require wireless carriers to prorate their ETFs for consumers who leave their contracts early so that the ETF for a two-year contract would be reduced by half after one year and to zero by the end of the contract term. In addition, the bill would mandate that wireless carriers would provide “clear and conspicuous disclosure” of the ETF at the time of purchase.

Co-sponsoring the bill with Klobuchar are Sens. Russ Feingold, Jim Webb and Mark Begich.

[flv]http://www.phillipdampier.com/video/CNBC Amy Klobuchar ETF Fees 9-13-07.mp4[/flv]

Back in 2007, Sen. Klobuchar introduced nearly identical legislation to deal with mobile phone providers charging high termination fees.  CNBC ran this debate between Klobuchar and the cell phone trade association.  Klobuchar found herself in a 2-against-1 debate when the CNBC anchor defended the wireless industry.  (9/13/07 – 5 minutes)

Currently there are 11 comments on this Article:

  1. Jason says:

    The FTC just needs to act like the FDA and require at a minimum ‘fine print’ included with each plan detailing the total costs over the contract term, ALL fees whether provider or government, and ETF fee. Then a final tally taking all costs into account dividing the estimated term with fees, hidden charges, and giving a true monthly cost.

    There’s no reason they can’t print the basic charges, then provide an automated cost estimator just like e-commerce shipping esitmators to determine your true price in an easy to understand and read format.

  2. My big problem with the phone subsidy is that if you don’t take advantage of it, the built-in recouping of that subsidy is right in your monthly service cost. No discount for those who buy their phone retail, so what’s the point of not getting the phone with the subsidy unless the only thing you value is contract freedom.

    BTW, most providers let you do annual contracts, in return for a lower subsidy. That’s something to consider if you want a discount off the phone, but not a 24 month commitment.

    • Uncle Ken says:

      My response would be why do people need a $500 phone? Plan on taking
      if with you? Like money it ain’t going to happen. Something on CNN that
      cant wait till one gets home? Foolish.

    • Ron Dafoe says:

      I agree. There should be 2 options – one with a cheap phone with current monthly service prices and one with a retail phone and cheaper monthly service prices.

  3. SAL-e says:

    What the hell? It is Verizon’s BS. If the consumer could not buy the phone at retail price of $400, he or she should not buy it at $200 + 24 * 8.33 + interest of minimum of 5% = $410.58

    My calculations do not include:
    1. Volume discount that Verizon receives from phone manufactures;
    2. The real interest that their bank is charging the consumers. The interest rate is only about 1% over the average inflation and if we compare it with other consumer loans it is ridiculously low.

    It is simple If you can not buy it in cash you should not buy it with lone. It makes economic sense to use loan only if you can make more money with your cash then the finance charges for the same period.

  4. Uncle Ken says:

    Just learned today of the five people I talked to two just died
    of cancer so im now down to three. And I need a phone why?
    So im probably going to be a bit bitchy for while.

  5. Jason says:

    It’s not just the subsidy either, what’s the point of buying a Verizon CDMA phone outright when you can’t take the damn thing to any other network to use it? Or buy an AT&T or other GSM phone that’s locked to t he provider, or like the iPhone with exclusive features like visual voicemail that only work with AT&T.

    The wireless industry really is a mess with customer lock-in and razor blade style sales to maximize their profit off charging excessive monthly fee’s to recoup the small discount on the phone in the next 12-24 months.

    Someone most of us have gone from saving money by dropping our home phone to paying as much as $80+/mo for wireless that shouldn’t even cost more than half that.

  6. Uncle Ken says:

    Jason: I agree. Come on $500 or a $1000 for an unlocked phone just
    a firmware change away from being back in the fold. Game systems
    sales are tanking and it don’t cost $500 for a phone made in china.
    Just not that much to them. I wonder if it it cost them $50 each as
    the circuit boards are punched out in auto process with somebody
    making a couple of dollars an hour to screw them together. Apple
    and ATT sure got you suckered. You mentioned $80 a month that
    is insane. Providers scream we do have the ability but for an extra
    $30 a month they find limited room for you. These phone plans
    have to be the best screw job on the planet. Better then oil or gas.
    I have to admit playing with an iphone for 19.95 a month would
    be fun something to kill some of my limited time here on earth.
    It’s not going to happen but would be fun. I think sales are way
    down except for the pretty people with mom and dad kicking
    in. Never saw an iphone for real… just a few pictures. nobody
    I know has one. Jason this comment has it not for you but rather
    all the suckers that keep paying those prices. They are the ones
    who keep it all running.

  7. Tim says:

    My beef is this: If the phone is really subsidized as they say, then show it on the bill and after the 2 yr. contract is up, my plan should be cheaper since I am not paying for the phone anymore. But wait, that isn’t what it is because even if you cancel the contract 1 month before the 2 yr. period, you are still charged like $120!

    The cell phone industry and providers need a reality check big time. The ETF isn’t the only thing they are screwing people over with. It is everything they practically do. Even if you buy the phone at retail, you can’t take the phone to another provider because of custom software installed by the provider, ie branding. And if you want to unbrand your phone with stock manufacturer firmware, it is near impossible to do without some kind of technical knowledge. From ring tones to proprietary connections to forced plans to purposely over priced phones which force you into a contract, the consumer is getting screwed left and right. I really hope and pray our government can step in and stop this. It is really getting ridiculous.

    Uncle Ken:

    Totally agree with you bud. These phones are not that expensive to make especially once they have been out for awhile. They purposely over price the phones to force people into a contract. They know a lot of people don’t have $500 just lying around to plop down on a phone. And I agree with you, who needs a $500 phone in the first place.

  8. Jason says:

    Remember when the Moto RAZR was hot? It cost me $350 when I had to buy one unlocked, I think they were around $200 on contract, and not a year later they were free. These phones don’t have a fixed cost of $500+ for their entire product life as production efficiencies and volume drasticly lower costs.

    So when the cost of the iPhone for example, such as the older 3G which is already discounted goes down, I don’t see Verizon voluntarily offering to reduce the ETF from $350 down to $175 when they’re able to offer the phones.

    If the industry is incapable of managing itself and operating in a fair and transparent manner with consumers on a voluntary basis, then yes the government should step in and start ratcheting up the pain until they do.

    Coming from a family thats owned and operated many small businesses I’ve always been pro-business and not thought highly of government intervention into commerce, but big business, especially these corps and mega corps wield too much power and influence while acting directly against consumer and customer interests in their markets to be ignored any longer.

  9. locsphere says:

    Is this lady interviewing an idiot? We know what we are getting into? Sure we do, but there a ton of fee’s that get added I didn’t know about. I broke up with my girlfriend and couldn’t get rid of the phone even after a life changing event I was heart broken and broke and there was nothing to help with an extenuation circumstance. Now the companies are charging cancellation fee’s across the board.. You see now if I want cable which is a luxury I have to stay in a year or pay 179 dollars to cancel. It is ridiculous. They offer now other solutions and the other companies do the practice as well. So there is no choice in the matter. If you want to cancel your service you have to pay a cancellation fee. How is this promoting competition by making it so I can go to another provider without having to pay a hefty fee. If it was 10 dollars even 25 dollars fine. I can live with that. But 179 dollars fios wanted to charge me for tv. Don’t want to pay that if you decide to cancel fine you don’t get any of our promotions. So its either do what we say or you don’t get our service. These companies are so huge now that caring whether one customer leaves doesn’t concern them. It is about maximizing profits and the customer is always right are long gone. You want things your way? Then pay a fee. My mother was paying for a phone for my grandmother who past away from cancer. When she tried to cancel the phone they didn’t care. Sooner or later consumers are gonna revolt. Violently.

    Everyone from credit card companies to communication companies to the local state government is trying to nickel and dime you and they are doing a great job. Because of all these things I have to have I have no disposable income… All so they can see a 3 point gain in the stock market and the ceo can get a hundred million dollar bonus. The rules and regs congress had in place have been destroyed by lobbyist talking to house members with liberal arts degree’s who don’t have any idea that its going to harm the consumer.

    Any time a company tells me something is good for me I call BS.

    Its like the government telling me gun control is good even though studies show the contrary. Bottom line of course they are gonna say its good. It gives them more power to control and profit.

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