Mobile carriers defend early termination fees

Customers know the terms of the deal when they buy mobile plans, AT&T says

Early termination fees for mobile phone contracts are necessary to subsidize the cost of smartphones and customers know what they're getting into, mobile carriers told the U.S. Federal Communications Commission in comments filed this week.

Without early termination fees, or ETFs, customers would pay hundreds of dollars more for smartphones, including Apple's iPhone, AT&T said in a filing. AT&T customers get a US$400 discount on the 16GB Apple iPhone 3GS if they sign a two-year contract with a prorated ETF of $175, wrote Robert Quinn, AT&T's senior vice president for federal regulatory affairs.

AT&T customers could also pass up the $400 discount and pay $599 for the iPhone without a two-year contract, Quinn said.

"Customers clearly understand that they have choices," he wrote. "While the vast majority of AT&T's subscribers choose term commitments and discounted or free handsets, AT&T has millions of month to month and prepaid subscribers. Still, overwhelming consumer demand for such bundled discounts drives carriers to make even highly sophisticated and costly devices like smartphones and netbooks available at steep discounts, even from the moment they are introduced."

In January, the FCC asked U.S. wireless carriers and Google, which sells the Nexus One phone, to explain their ETFs. The comment deadline for the FCC's inquiry into ETFs was Tuesday.

Several consumer groups have complained that ETFs are excessive, and in December, the U.S. Government Accountability Office released a survey saying that 42 percent of respondents wanted to switch carriers but did not because of ETFs.

In November, Verizon Wireless doubled the ETF for "advanced devices" to $350.

Since the FCC inquired about the Verizon fees in December, the company has made a couple of changes, wrote Kathleen Grillo, Verizon's senior vice president of federal regulatory affairs. Verizon is changing the price displays next to phones in stores to include the ETF amount, and it has reduced the number of devices that have a $350 ETF, she said.

"Verizon Wireless strives to ensure that customers are aware of their options, understand the differences among those options, and have access to assistance when questions arise about their device and service plan," Grillo wrote.

Google referred questions about the ETF charged in conjunction with its Nexus One phone to T-Mobile, the first carrier offering mobile service to Nexus One users. Customers can also purchase the Nexus One without a mobile service contract for $529, and Google is working to expand the number of carriers that support the device, wrote Richard Whitt, Google's Washington, D.C., telecom and media counsel.

Google and T-Mobile have worked together to reduce ETFs from $350 to $150 starting earlier this month, Whitt added.

Some people providing comments to the FCC questioned if the terms of mobile phone subsidies are clear. While there have been discussions about mobile phone contracts and ETFs as financing the cost of smartphones, that's not how the deals are sold to the public, wrote George Thiruva, an editor at Gadgetopolis.com.

"The general public probably has few complaints about using available financing to purchase high priced items when the terms are clear and honest," Thiruva wrote. "But in this case, clarity and honesty is not something that customers get. In the marketing of cell phones sold by AT&T, T-Mobile, Verizon, Sprint, etc. there [is] almost never any indication that customers are entering into a 'financing' arrangement."

AT&T has a Web page advertising free cell phones, Thiruva noted. "None of these products are really 'free' since AT&T requires a two year service contract and will charge an early termination fee if applicable," he wrote.

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