Verizon could raise ETFs for smartphones

Verizon Wireless made a big move three years ago when they announced they would prorate early termination fees. The industry practice was to charge between $175 and $200 for customers who canceled their contracts early. The fee exists to ensure that customers don’t buy a subsidized phone and then just bolt without covering the cost with their monthly plan fee. Verizon’s prorated plan reduced the ETF by $5 each month, so if you wanted to cancel after month 20, you would have to pay only $75. The other three major carriers followed eventually, making it the new industry standard practice. Now Verizon, the prorated ETF pioneer, is rumored to be raising its ETF on smartphones. It sounds harsh at first, but this is actually the right move for Verizon.

Two or three times per year, for a month or longer, Verizon runs buy one get one free offers (BOGO). Customers can buy one phone and get another of equal or lesser value for free. That means more contracts for Verizon, since a two-year contract is required for a subsidized phone. So if a customer wants two BlackBerry Storm 2 devices, they’d have to sign two two-year contracts in order to get them both for $179.

Some people are taking advantage of Verizon’s generosity. They’re buying two handsets and then immediately canceling one. That costs them $175, but the profit is in selling the canceled device on eBay. Check out the listings for the Storm 2. They’re going for more than the $175 cost, so it makes for a profitable reselling scheme. Then again, it’s really a one-off thing where you can pocket $300 or so. I imagine it would be difficult to pull this off more than once.

To combat this, Verizon is thinking about raising the ETF on high-end smartphones to $350. You can still cancel and resell in that instance, but Verizon will have made back most if not all of the phone’s cost, and the reseller won’t find the profit nearly as attractive. The up-front cost is $529 (the devices plus the ETF), and the devices seem to be selling for slightly more than that on eBay. With the $175 early termination fee, customers could sell the extra device and cover all of their costs plus put some extra cash in their pockets. With the ETF doubled, it’s not as easy a win.

If Verizon comes through on this, and I expect that they will, expect it to extend beyond their BOGO offers. Again, it might not be totally profitable, but customers can still eat the $350 for the device and early termination fee and sell it on eBay. At that point I’m not sure Verizon has even covered its own costs on the device. That would give them less of an incentive to offer BOGO deals.

Filed under : Early Termination Fees