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Summary:

The day after the FCC released its wireless competition report AT&T said as of June 1 it will raise the early termination fee on the iPhone to $325. Is it a sign of the carrier’s imminent loss of iPhone exclusivity, or a lack of wireless competition?

AT&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 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 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

  1. [...] By James Kendrick May. 21, 2010, 3:16pm CDT No Comments        0 GigaOM reports that AT&T has raised its Early Termination Fee to $350 from the $175 it is now charging. The [...]

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  2. Does this change temporarily give us the right to terminate our contracts without any ETF?

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  3. michellackeret Friday, May 21, 2010

    “…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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  4. “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!

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  5. [...] GigaOM] Click To Share This! Hide Sites $$('div.d1731').each( function(e) { [...]

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  6. 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….

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  7. 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.

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  8. 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.

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    1. 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.

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  9. 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.

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  10. [...] Higher Termination Fees: AT&T is getting competitive. As more iPhone competitors roll out, AT&T is jacking up in the price of the iPhone termination fee from $150 to a whopping $325. The move comes months after Verizon increased its termination fee for select smart phones to $350. Will a higher termination fee keep you in your phone longer? The carriers certainly hope so. [...]

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  11. [...] of activation and a two-year service contract with AT&T. Couple this with AT&T’s recent increase in its early termination fee means that while this phone is a great value, it’s still going to be a while before you can [...]

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  12. [...] of activation and a two-year service contract with AT&T. Couple this with AT&T’s recent increase in its early termination fee means that while this phone is a great value, it’s still going to be a while before you can [...]

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  13. [...] said ETFs were a major reason they would stay with their current service (which may be why AT&T is following Verizon’s boost in ETFs with one of its own come June). The termination fees aren’t used as much in fixed-line [...]

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  14. [...] the fact that AT&T recently jacked up the price of its early termination fee to $325, effective next week, is just further evidence that AT&T expects to soon be losing its cash [...]

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  15. [...] AT&T has locked in a lot of users in the most recent iPhone upgrade cycle. It’s no secret that AT&T knows when its exclusive iPhone deal ends with Apple, even if others don’t. So the carrier will likely plan accordingly for any churn and lost customers that would defect for an iPhone on Verizon’s network after its exclusivity ends. If Verizon is getting the iPhone in 2011, it would make sense for AT&T to lock in as many iPhone 4 customers as possible beforehand. And AT&T was indeed generous in advancing the iPhone 4 eligibility dates for current iPhone 3GS customers — that offer locked new iPhone 4 owners in for an additional 2-years under a newly raised termination fee. [...]

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  16. [...] may turn off users to not only a device, but also an entire platform. The system also tends to reinforce the power of the two dominant carriers because they will continue to get the best handsets and thus keep attracting more [...]

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  17. [...] amount of spectrum owned by Verizon and AT&T for 4G services as well as device availability and high switching costs make the nation’s wireless carriers less competitive than one might think. Additionally, open [...]

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  18. [...] in December of last year, doubling the cost to get of a contract to $350 from $175 on smartphones. AT&T followed by boosting its Early Termination Fee to $325, adding a higher barrier for consumers who want to leave the carrier. Increased hardware subsidy [...]

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  19. [...] the agency’s inquiry into higher early termination fees on smartphones, that both Verizon and AT&T have enacted. As a wireless consumer, I’m excited to see an active FCC, but as a reporter covering [...]

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  20. [...] networks as possible. Meanwhile, the operators have a huge incentive to offer solid devices and contracts as a means to lure consumers onto their network for as long as possible, regardless of the network [...]

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