Verizon Early Termination Fee Draws Congressional Ire

It was only a matter of time before someone in the public eye got upset about the new Early Termination Fees from Verizon. There have been discussions on Lockergnome about the changes in the ETFs, and a few things were brought to light.

The first is that the higher $350 ETF only applies to more advanced phones, and the definition of more advanced, is something, at this time, that Verizon reserves the right to define on a per phone basis.

Next, due to a ruling some time ago, this fee, like the smaller ETF for standard phones, is pro-rated over time, with the EFT being reduced by $10 for each full month of paid service.

Also brought out once again, is the fact that customers don’t like the ETF at all, yet absolutely love the up-front discounts that are offered them when they sign up for service.

Ars Technica tells us about the Senator from Minnesota that has become riled over the new level of penalty fees from the nation’s largest wireless provider.

Verizon has gotten on the bad side of US Senator Amy Klobuchar (D-MN), who publicly criticized the company this week for its decision to significantly jack up early termination fees (ETFs) for some customers. Not only did Klobuchar send a letter to Verizon president and CEO Lowell C. McAdam calling the move “anti-consumer and anti-competitive,” she also wrote the Federal Communications Commission asking for a review of the decision. Verizon has its reasons for the increase, however, and points out that customers are more than welcome to purchase devices at their full retail price with no threat of an ETF.

This has been a policy of every wireless company I’ve ever worked for, however, most people aren’t willing to pay the upfront costs, as they know the phone loses value over the course of the contract, and would be worth little as a saleable item at the contract end. This is one of the ‘gotchas’ that everyone knows, but no one wants to talk about. The only way that paying for your phone at the beginning of the contract is a good thing is if you absolutely know you will be leaving early. Otherwise, you must realize that you will be paying the very same rates as the person who allows the two year contract to pay the cost of the phone, and then moves along. Because of the way that cell phones were marketed from the beginning, the phone effectively becomes a consumable, though it really does not need to be.

Verizon announced last week that, beginning November 15, its early termination fees for customers buying “Advanced Devices” (smartphones) would double from $175 to $350. Every month that passes, that fee is reduced by $10. This means if you buy a Droid with a two-year contract with Verizon, but decide to switch providers after 12 months, you’ll find yourself shelling out $230 to Verizon for exiting the contract early. In fact, if you cancel 23 months into the contract—one month before it’s over—you’ll pay $120. (That’s almost the entire old fee altogether.) If you wait one more month, you’ll pay $0.

Here is where the main problem lies, from a concept of fairness and logic. If the customer is given a pro-rated ETF, why is the pro-ration so much in the provider’s favor? Doing the simple math, the reduction of ETF should be almost $15 per month, not $10.

(For reference, most other carriers charge around $200 for the early termination of a service contract, with many offering the same type of pro-rated fee schedule that Verizon offers for every month of completed service. This even applies to high-profile devices like AT&T’s iPhone and various BlackBerrys from different carriers.)

The one thing everyone knows is that if the Verizon decision to raise the ETF is sustained, all other providers will follow suit. Here it is less a matter of greed and more one of survival.

This decision rubbed many consumers the wrong way, but apparently none more than Klobuchar. She’s behind the Cell Phone Consumer Empowerment Act, a bill that aims (among other things) to bring more transparency to the inner workings of the cell industry and keep early termination fees sane. In her letter to McAdam, Klobuchar said she’s concerned that such high fees “unfairly penalize consumers, bear little to no relationship to the cost of the handset device, and are anti-consumer and anti-competitive,” and that the move only emphasizes why her bill needs to be passed.

The thing about this is, it is not new territory. We went through this before, back in the 2002-2004 time frame. The conclusions drawn by most (thinking) people was that it was smarter to have the ETFs, and the subsidy of phones, rather than remove them and try to massively rethink the usage rates.

Similarly, in her letter to the FCC, Klobuchar said that the FCC needed to investigate the competitive and economic impact of ETFs on consumers. “Verizon Wireless’ decision shows us once again that the wireless industry cannot police itself and will not, on its own, make its practices more competitive and consumer-friendly,” she wrote.

I usually find myself on the side of representatives when they are advocating for the little guy, but here is a case where the senator has not thought this one out clearly. If not for the ‘buydown’ provided by the length of contract and the ETFs, chances are we would not have the capabilities on as many devices as we do. Allowing the cost to be spread over the two years allows many who would otherwise not be able, to join the smart phone party. It is a good thing.

Verizon, for its part, defends the decision by pointing out that users can freely choose between being subject to ETFs or not. “Verizon Wireless customers do not have to have an ETF at all if they do not want one. ETFs allow customers to have it either way: no ETF with full retail for a device, or a greatly discounted device with an ETF,” Verizon General Counsel Steve Zipperstein said in an e-mailed statement to Ars. Zipperstein added that many customers choose the subsidized model, allowing them to have easy access to new technology and encouraging wider adoption of mobile devices.

This isn’t the first time such an argument has been made—AT&T said the same thing in 2008 when it faced the FCC over this very issue. These arguments may all technically be true, but most people certainly don’t see it that way. ETFs remain a thorn in the side of nearly everyone who has a cell phone, though the recent adoption of pro-rated fees has helped customers see the system as more fair. When a carrier pulls a Verizon and decides to double the starting amount, though, those bitter feelings start to come back in full force, and this isn’t likely to be the last we hear about Verizon’s decision.

While we can argue about the greed versus continued existence as the major factor, one thing is certain; as long as people are unwilling to make a huge change, immediately, the ETFs and termed contracts will be around.

There are tow things that tend to govern business in free markets, and both are applicable in this– “caveat emptor” & “whatever the traffic will bear”.

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