FCC Questions Verizon's Early Termination Fees on Smartphones

Lora Bentley

I imagine that at least once, in business or personally, everyone has stuck with a service provider he or she didn't like for at least the length of the service contract, if only to avoid early termination fees (ETFs). And vendors no doubt know it, because the fees keep getting higher.


Verizon Wireless may have pushed that particular envelope a little too far, however. When the company doubled its early termination fees from $175 to $350 recently, the Federal Communications Commission stepped in and asked for an explanation. eWEEK quoted the FCC's letter this way:

In light of the Commission's ongoing interest in the issues associated with ETFs and its pending proceeding regarding disclosure of billing information to consumers, we seek a more complete understanding of these practices.

This week, Verizon delivered. InformationWeek reports:

In a response to a probe by the Federal Communications Commission, Verizon Wireless said its raised early termination fees are necessary to get advanced devices like smartphones to consumers at reasonable prices.

In other words, the early termination fees compensate Verizon for the loss the company takes when it provides a customer a smartphone at a discounted price and then loses that customer -- and presumably his or her phone -- to another provider. The increased fees also apparently cover increased marketing and support costs Verizon incurs to sell the smartphones.


It makes sense, but if the company is going to argue that point, the numbers better add up. Especially if legislation being proposed in the Senate becomes law. According to Ars Technica, Sen. Amy Klobuchar, D-Minn., introduced the Cell Phone Early Termination Fee Transparency and Fairness Act, S. 2825, early this month, and it was actually Klobuchar's letter to the FCC that prompted the investigation. The bill, which has been referred to the Senate Committee on Commerce, Science and Transportation, would essentially require three things: 1) The ETF terms must be fully disclosed to customers. 2) The ETF must not exceed the subsidy the provider gave the customer on the handset. 3) The ETF must be prorated for the length of the service contract.


As Ars writer Chris Foresman explains, Verizon's current ETF structure wouldn't pass muster if the bill were to become law:

[U]sers that buy an "advanced device"- in other words, a smartphone - would have their early termination fee arbitrarily doubled to $350, and the fee would only be reduced by $10 every month. Such an arrangement nets Verizon $230 if a contract is cancelled after 12 months; it would still net Verizon $120 if the contract were cancelled after 23 months.

Klobuchar calls the move anticompetitive, Foresman says.

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