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Summary:

I thought it was a good idea when the FCC asked Verizon to explain why it doubled its early termination fees. Verizon has responded with a letter that tries to pass itself off as a manifesto that anything it does is good for the people.

When the Federal Communications Commission (FCC) a few weeks ago asked Verizon to explain why it doubled its early termination fees, I thought it was a good idea that the FCC was raking the wireless giant over the coals. You know, keeping them honest and whatnot. My stance prompted one Verizon spokesperson to jokingly (or not) refer to GigaOM as the the Pravda of the technology world. I wonder if he privately refers to FCC as the central committee.

Verizon responded to the FCC with a letter that reveals nothing but tries to pass itself off as a manifesto that anything it does is good for the people — I mean, consumers. I didn’t expect anything major anyway, but still, the 13-page response (plus exhibits) is a good way for you to replace any melatonin your body might be missing. I have been cracking up at the content of the letter, which quotes FCC policies set by a very telco-friendly FCC Chairman and ex-telco lobbyist Kevin Martin. For example:

The Commission held in 2003 that “carriers may include provisions in their customer contracts on issues such as early termination and credit worthiness.” In that order, the Commission disallowed wireless carriers from restricting the number porting process, but also stated, “We do not sanction or encourage consumers to breach their contractual obligations. Nor do we prevent carriers from collecting any outstanding fees or charges from consumers pursuant to traditional contractual remedies.”

That same year, in upholding the lawfulness of an ETF, the Commission noted “the history of Commission approval of early service termination provisions similar to the one at issue here, and the reasonable goals that they generally serve.” It also stated, “……the Commission has allowed carriers to use early service termination provisions to allocate the risk of investments associated with long term service arrangements with their customers.”

The most ludicrous response is to the question of why Verizon charges $120 in early termination fees even in the 23rd month of a 2-year-long contract.

The new ETF structure for Advanced Devices begins at $350 and declines by $10 per month for a two-year contract. Thus, a customer terminating in the last month of a two- year contract term could be assessed an ETF of $120. This ETF structure is fair and reasonable for several reasons. First, taking customers who terminate their contracts before the end of the contract term as a whole, Verizon Wireless still incurs a financial loss from early terminations, even with the $350 ETF.

Second, prorating the ETF to zero in the last month would mean that, to recoup the same amount of the losses caused by early terminations as a whole, Verizon Wireless would have to set the starting amount for the ETF higher than $350.

  1. Ryan Christensen Friday, December 18, 2009

    I get that people have a general disdain for ETF’s, but I can’t say that I don’t (at least partially) understand where the carriers are coming from.

    They’re subsidizing the retail cost of some rather expensive devices… so to say that paragraph is “the most ludicrous response” seems to demand some further explanation. What would you have them do instead? Were you the carrier in question, are you saying you wouldn’t want to (mostly, if not fully) recoup the financial loss? (Point being, their argument could use more meat/specifics, sure. But the logic in their point seems sound.)

    That is, unless you’re suggesting that Verizon (and the other carriers, presumeably) are flat out lying about the costs they face which they’re making up for with ETF’s… which seems remotely possible until you start to consider the per-customer cost of being a carrier (while subsidizing their devices because people take issue with buying devices at full price.)

    Don’t get me wrong — I’m all for keeping carriers honest. I think it’s good that the FTC is checking into this. I just get the feeling that people like to rail against ETF’s because they tend to have selective memories about how much subsidies save them. My response tends to be, “well, you are the one that wanted the $600 smartphone for $199.” As they say, you get what you pay for — this situation seems to be no different.

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    1. “Point being, their argument could use more meat/specifics, sure. But the logic in their point seems sound.”

      The logic fails all over the place you’re just clearly buying into it. Let’s start with symbiotic relationship between the “advanced devices” and the cost of your monthly contract. Buying these “advanced devices” forces you to pay more in your monthly contract for the data plan; thus if “people take issue with buying devices at full price,” then they’re not going to be getting as many data contracts. So at bare minimum you have to lump the data contract at least partially in with the ETF because without the “advanced device” you pay about half as much for the contract.

      I also take issue with any comparison with the retail price. The retail price is kept artificially high due to the lack of competition for prices because you get your phone with your data plan, and the carriers don’t pay retail for the devices.

      There is no contract without the discount on the phone. So you really can’t say they are losing 24 months of income from your canceling the contract early because people wouldn’t sign the contract for 24 months if they weren’t receiving a discount on the phone whatever it actually costs. So simply stating, “First, taking customers who terminate their contracts before the end of the contract term as a whole, Verizon Wireless still incurs a financial loss from early terminations, even with the $350 ETF,” is very misleading. I take this to mean they are losing money because you aren’t paying them for n more months that remain on the contract the $x a month you agreed. However that doesn’t mean they aren’t making a profit off your contract it just means they didn’t make as much as they could. I can only assume they left that statement purposefully vague to allow people to interpret it inaccurately to mean they didn’t make a profit. They never state how long into the contract they begin making a profit.

      “Second, prorating the ETF to zero in the last month would mean that, to recoup the same amount of the losses caused by early terminations as a whole, Verizon Wireless would have to set the starting amount for the ETF higher than $350.”

      No you don’t have to recoup the costs of the early termination as a whole because by canceling the contract people are stating they don’t like your service, and wouldn’t be paying you for the x months remaining on their contract anyway they would still cancel because they don’t like your service. They should only be using the ETF to cover the costs associated with the device purchase and nothing more since that is the only “break” they gave you.

      As for the they’re a company who has the right to make a profit. Well they’re using bandwidth leased from the government and the citizens really don’t have much of a voice in congress anymore. So I’m all for the FCC going after service providers for unfairly gouging customers who dislike the service they are getting, and trying to mislead people into thinking they lose money if you cancel your contract with them in the last month.

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    2. “They’re subsidizing the retail cost of some rather expensive devices”

      What’s the cost of goods on these phones, even the Droid or iPhone? Did this cost just double?

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      1. Ryan Christensen Saturday, December 19, 2009

        @ifstone: Droid full retail is $559. I’m not sure off hand on the iPhone, but remember it being between the $5-600 range. (Though if memory serves, you might not even be able to buy an iPhone now without subsidy — can anyone correct me here?)

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  2. While it might be in vogue to take a shot at Kevin Martin. Too bad you don’t read what you write. In 2003, Kevin Martin wasn’t the Chairman of the FCC. Om, I guess you don’t mind or care when facts get in the way…

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  3. Sounds like a very loud & clear: “FU”.
    God help me, in order to get the hell away from AT&T, I will likely contract with Evil Verizon. I need coverage & tether and don’t see any other options.

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  4. i just think we need to do away with phone subsidizes and offer financing to customers instead if they can not afford to pay upfront.

    that way the bill would be split from the beginning between the monthly fees and the finance charge for the handset. if a customer wanted to change carriers they could only continue to pay the financing on the phone but not the monthly fee(they would pay the new carrier that) of course they could also choose to buy the phone upfront and clearly see the savings of no having to pay the interest for two years,

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  5. I have no problem with the fees! As long as carriers are allowed to have introductory pricing that goes up after 6 months to a year, as long as carriers give phones away at below market costs, the consumer should pay for any change. Nothing wrong with that. The consumer wins unless they are corrupt and want to change carriers to take advantage of the next deal. Screw them!

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  6. It’s really simple.

    ETF at those rates is fine, as long as over a two year period those that bring their own devices or buy one at full price are charged less.

    Somehow, I don’t see a BYOD pricing plan with any carrier. In essence they make MORE on someone who chose to Bring Their Own Device.

    Perhaps the FCC should say, “ok, charge these rates, but, if someone brings their own device, and the device is prorated at $350 over two years, then the monthly fee is prorated over those 24 months the same way or roughly $15 a month less per user.”

    This also means that someone who doesn’t upgrade every 24 months should also get a rate decrease after meeting their commitment.

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  7. [...] Mobile Phone Cancellation Fees Help the Poor, Verizon Tells Feds and Verizon Perfects the Art of the Non-answer – Verizon responds to the FCC about its higher cancellation fees. Try not to [...]

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  8. [...] commitment and $200 Early Termination Fee information popped up. Here’s the burning question: if ETFs are meant to protect carriers against early losses of subsidized hardware, why would there be an ETF associated with a data-only plan? The fact is — there [...]

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  9. [...] commitment and $200 Early Termination Fee information popped up. Here’s the burning question: if ETFs are meant to protect carriers against early losses of subsidized hardware, why would there be an ETF associated with a data-only plan? The fact is — there [...]

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  10. [...] its termination fee on smartphones to $350 and had to justify its moves to the FCC. No one was impressed with its defense, but Verizon is still charging the higher ETF (although it is now dropping the amount owed each [...]

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