I'll Show You Competitive…AT&T Jacks iPhone Termination Fee

26 Comments

AT&T (s T), a day after the Federal Communication Commission released its wireless competition report (it was the first year since 2003 that the agency didn’t declare the industry competitive), said it would raise the early termination fee on smartphones — including the iPhone — to $325 from $175 as of June 1. This may be an indication of the carrier’s imminent loss of iPhone (s aapl) exclusivity, but it’s also bad timing from a major carrier.

Carriers justify early termination fees because they subsidize the price of hardware for cellphone buyers in exchange for those buyers agreeing to a one- or two-year contract. Verizon (s vz) last year raised eyebrows when it increased 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 month by $10). AT&t will also lower the fees by $10 a month, and is lowering the early termination fees on non-smartphones to $150 from $175.

It’s not unusual that AT&T is following suit behind the nation’s largest carrier, although it is ironic timing given that high ETFs generally reduce the freedom of consumers to change providers, making the industry overall less competitive. Of course, having the nation’s top two providers set similarly high termination fees doesn’t look that great for competition either.

Related GigaOM Pro Content (sub req’d): How AT&T Will Deal With iPad Data Traffic

26 Comments

Jack Won

Frankly, American buyers have just gotten hooked on subsidies. Just buy an unlocked phone and go contract free – and quit whining.

Oh wait, you want the carrier to give you a subsidized phone upfront and not stick around when you got it ? Entitlement junkies.

A.B. Dada

Thanks for COMPLETELY IGNORING a carrier that has actually given us choice: T-Mobile. You can buy a contract-free cell phone and you actually get a LOWER monthly fee.

AT&T and Verizon don’t want to offer this, but it’s important when you proclaim lack of competitiveness to actually shine the light on one carrier who is offering real choice.

Ray

I think you miss the point here. The fact is you can buy contract-free AT&T cell phones as well and used your own unlocked phone with AT&T’s GoPhone and MediaNet services and T-Mobile’s ToGo service (as far as I know T-Mobile doesn’t offer a service equivalent to MediaNet though I would like to be proved wrong.)

For me the question turns on the true nature of subsidies and ETF’s. For it’s part T-Mobile subsidizes phones and has ETF’s as well.

Carrier’s justify ETF’s as a mechanism to recover the upfront cost of offering a phone at a discount to the actual cost. However, when evaluating this claim, consider two things. First, studies have shown that carriers also use subsidy recovery to justify contractual service rates higher than that actually need to recover the upfront subsidy. From the consumer prospective, a subsidy is actual just a loan with a high interest rate.

Second, ETF’s rarely reflect the time-adjusted cost of the subsidy over the life of the contract. Not only do ETF’s inhibit consumer choice by making it costly to terminate contracts, they’re a money making proposition for the carriers. It’s a win-win situation for them; a lose-lose situation for consumers.

It says something about the state of the market: since all carriers have adopted this subsidized phone/ETF model they’re acting more like a cartel than a true competitors.

As you eluded to your post, carriers are offering alternatives. In the last few years the prepaid and paygo markets have exploded, while the number of people in contracts has remained essential flat. Obviously consumers are finding attractive alternatives in contract-less unsubsidized phones. However, the option may not be right for everyone and carriers are not above throwing up roadblocks. T-Mobile’s lack of a pay-as-you-go data option is one example.

I wouldn’t mind if subsidies and ETF’s were band outright. Carriers would still be free to offer discount’s and sales on phones bought with a contract commitment, but they would have to be real discount’s and sales.

Jon

Subsidizing cell phones is nothing more than a smoke screen to force consumers into a multi-year contract they do not want. It’s only a matter of time before the federal government steps in and makes this scam history.

Jobi George

So does this mean telcos are preparing us(US) for India type model where you buy your device and then pay as you go. No subsidy….

Ray

“It’s not unusual that AT&T is following suit behind the nation’s largest carrier, although it is ironic timing given that high ETFs generally reduce the freedom of consumers to change providers, making the industry overall less competitive. Of course, having the nation’s top two providers set similarly high termination fees doesn’t look that great for competition either.”

Well said!

michellackeret

“…Carriers justify early termination fees because they subsidize the price of hardware for cellphone buyers in exchange for those buyers agreeing to a one- or two-year contract.”

Does it mean that mean that a person (like myself) who had bought the iPhone through the Apple Store and paid full-price, will not get tacked with these ridiculous ETFs?

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