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We’ve been talking a lot lately about early termination fees, seeing as the government is trying to figure out how it can best protect big telecom from lawsuits. (Opinionated much?) We heard what FCC Chair Kevin Martin had to say on Friday, and much of it was reasonable. He could have extended the reach of some of the proposed ideas, but for the most part it seemed consumer friendly. Except, you know, the part that preempts lawsuits filed against telecoms in regards to early termination fees. Comsumers Union has weighed in on the matter and unsurprisingly, they’re not too happy about ETFs and the lawsuit preemption proposal.
Early termination fees are penalties designed to stop consumers from switching companies for better service and better price. Period. These penalties don’t save consumers money as the carriers claim, they rob consumers of the benefits that an open and competitive market would otherwise bring. Evidence was recently presented at trial in Ayyad v. Sprint2 in California that Sprint’s early termination fee program actually cost them more money to implement than they recovered from it. In other words, this program doesn’t save consumers money—it costs them extra.
Further, according to internal memos, the company performed one calculation and one calculation only in determining the ETF: the effect on subscriber churn.3 That is, they didn’t examine whether they fully recovered “subsidies” they offered consumers, they simply said this will make it harder for consumers to switch. Clearly, this is about penalizing consumers for voting with their feet and pocketbooks, not about saving them money.
So are phone subsidies just a red herring? I’m not as sure as Consumer Union, though reducing churn does seem to be high on the priority list for carriers.
Consumers Union cites the Uniform Commercial Code, which is the law in all 50 states. “[It] says that liquidated damages clauses can be used to recover actual damages, but they cannot be used as arbitrary penalties designed to prevent consumers from switching companies.”
They go even further, saying that the average subsidy on a phone is $14.33. The math is that the average value of a handset in 2006 was $115.50, and the average customer paid $100.67 up front for the phone, plus activation.
If you’re interested in your rights as a cell phone consumer, you should give the whole thing a read.
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