All the major wireless carriers have been in trouble over their early termination fees (ETFs) at one time or another. A few of them have been targets of class-action lawsuits, and have paid large settlements to plaintiffs in those cases. The mobile companies have also gotten the attention of the Federal Communications Commission (FCC) in recent years because of ETFs. They’ve come under even more scrutiny by the FCC lately because of increased ETFs, as well as other questionable fees they’ve been charging their customers, and it’s all about to come to a head now that the carriers have provided their most recent responses to the government agency.
It hasn’t been uncommon for ETFs to go up over the years as phones have become more expensive. The general idea is that ETFs exist to allow carriers to recoup some of the money they lay out in device subsidies should the customer cancel the contract early. It makes sense. Someone could sign up, get an expensive smartphone for half price or less, cancel the contract, then go sell the phone on eBay for a big profit. In fact, a lot of people were doing that, which is what precipitated the implementation of ETFs in the first place. It’s reasonable for carriers to try to protect themselves from this kind of loss. It also allows them to continue to sell devices at lower prices, which benefits everyone.
Late last year, Verizon didn’t just raise its ETF, it doubled them on just about every smartphone in their lineup, bringing the fee to $350. A lot of customers thought that was a little steep, and so did the FCC. They asked Verizon to explain its rationale for the increase. And here’s where Verizon messed up. Instead of sticking with the original reason for ETFs, and saying smartphones were more expensive and more desirable now, thereby necessitating increased ETFs, they added that the extra funds would also be put toward things like retail store management and sales commissions. Really? I thought sales commissions came from, um, sales, not cancellations. Bad move, Verizon.
Earlier this year, Google’s first phone, the Nexus One was launched to much hype on T-Mobile. The initial elation wore off quickly when potential customers found out that, in addition to T-Mobile’s own $200 ETF, Google would also charge an additional $350 equipment recovery fee (ERF). This was the first time a handset maker had ever charged any such fee, and it raised several red flags, not just with consumers, bloggers, and the press, but once again, with the FCC.
The FCC wasn’t satisfied with Verizon’s answers about its doubled ETF, and it was alarmed by Google’s huge new fee. In response, the agency asked all four major carriers and Google to explain themselves and provide rationale for the exorbitant fees. The five companies had until February 23 to respond.
During all of this, Verizon took about ten of its smartphones off the doubled ETF list, and Google reduced its fee by $200, presumably in attempts to appease the FCC and at least make it look like they were willing to be reasonable. Or, more accurately, to get themselves out of hot water. Whether that will have any effect on the FCC’s impending action remains to be seen.
Earlier this week, all five companies met their deadline and sent letters to the FCC explaining their ETFs and other fees. Not surprisingly, they defended their actions. The wireless carriers fell back on their standard argument that charging ETFs allows them to offer devices at lower, subsidized prices.
In their letter, Google explained that part of their contract with T-Mobile requires the carrier to pay Google a commission for each new or upgraded subscriber who buys a Nexus One. This allows Google to reduce the phone’s $579 cost by $400. If a customer cancels within the first 120 days of a contract, Google must repay the commission to T-Mobile. The ERF is in place to offset that. So basically, rather than just paying back money T-Mobile already gave them, Google is making the customer pay the penalty. What’s not clear is exactly how much that commission is, and whether the customer is repaying the same amount, or if Google is profiting a second time from the fee.
The FCC’s main concern is that not all customers are aware that the reason they are able to get phones at lower prices is due to subsidies. They’re also concerned that customers don’t know they don’t have to accept the subsidies, and can purchase phones outright at full price, thereby avoiding any ETFs. The carriers maintain they supply this information to their customers. But are they doing it well enough? Or is it buried in the mountain of fine print that’s included in the standard wireless contract?
The FCC is currently reviewing the companies’ responses, and will no doubt announce its findings in the near future. Several things could happen. The agency could say ok, the fees are justified, go on about your business. They could say the answers aren’t good enough and investigate further. Or they could begin the process of altering the way wireless carriers do business in order to better serve consumers. Now is when it will really get interesting.
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{ 2 comments… read them below or add one }
“what precipitated the implementation of ETFs in the first place”
Really? ETFs didnt exist before cellphones?
How would you explain the ETF on T1’s? people were gonna sell the cat6 cable for a “HUGE” profit on ebay?….
WOW.. REVIEW YOUR FACTS before you try to sound smart.
Thanks
I didn’t say ETFs in general didn’t exist before cell phones. Nor did I refer to the sale of any other equipment on eBay. I specifically said people were selling cell phones for a profit on eBay. I was referring to the implementation of ETFs as they relate to cell phones, not any other equipment. Perhaps if you read the post again bearing in mind that we cover cell phone topics, and relate that quote to what comes before it so it’s not out of context, that part may be a little clearer. Thank you for taking the time to post a comment.