Verizon Claims $350 Early Termination Fees Benefit Consumers

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Verizon CEO Ivan Seidenberg. Image: Cell Phone Trek

The FCC recently sent Verizon a letter of inquiry regarding the $350 fees it sticks consumers with if they terminate their cell phone contracts early. Verizon responded by claiming that $350 fees actually benefit consumers. Ars Technica has the story:

“This pricing structure enables Verizon Wireless to offer wireless devices at a substantial discount from their full retail price,” the telco’s 13-page statement (with 64 pages of documents) explains. “By reducing up-front costs to consumers, this pricing lowers the barriers to consumers to obtaining mobile broadband devices. It thus enables many more consumers, including those of more limited means, access to a range of exciting, state of-the art broadband services and capabilities.”

Mobile service companies have long argued that early fees subsidize the difference in cost between what the company pays the manufacturer of a phone, and the retail price for the device that it offers consumers. Verizon says that this “cost differential”—”the difference between the amount Verizon Wireless pays manufacturers for the device and the price it charges to customers on term contracts”—is double for “advanced devices” what than what it is for “basic devices.”

Verizon also had to hike its advanced device ETFs, the letter claims, because it costs more to advertise and sell them. “It takes more time (and hence increases the cost to Verizon Wireless) for sales and customer care representatives to handle customer inquiries regarding the complex advanced features and functionalities of Advanced Devices,” the company explains.

And then there’s Verizon operating expenses and investments in broadband networks: “The $350 ETF does not fully compensate Verizon Wireless for all these costs, particularly for customers who terminate at a relatively early point in the contract term, but it helps the company recover at least a portion of them.”

Senator Amy Klobuchar (D-MN) introduced a bill earlier this month that would stop providers from charging fees that exceed the price the provider paid for the phone minus what the consumer paid to buy it, according to the article. Verizon announced that it would double its ETFs from $175 to $350 for smart phone users in November, writes Ars Technica. “Klobuchar sent a letter to Verizon president and CEO Lowell C. McAdam calling the hike ‘anti-consumer and anti-competitive,’ and asked the FCC to probe the telco about the move.”

Verizon’s current strategy is to offer (subpar) smartphones cheaper than its competitors, using its high-quality network to lure in customers. It’s fair enough that they subsidize the cost of the handset–everyone does that–but I’d like to see some numbers to verify that “advanced phones” actually cost double, and that early termination revenues are needed specifically for advertising and servicing them.

It sounds like a guise to stop users from defecting to better smart phones offered by other companies. For transparency’s sake, the Senate bill makes sense.

  • John

    As much as I hate these fees that I’ve been stuck with on two different occasions (which is why i clicked to read it), I think the most disturbing part of this article is where it mentions that Senator Amy Klobuchar (D-MN) introduced a bill to put a pretty arbitrary cap on what a provider can charge for the termination fee. It’s unbelievable to me that congress keeps trying to regulate things like this. Of course it’s an attempt by providers to keep customers from defecting to other providers. Do you know how to fight that? Don’t use Verizon for your cell phone coverage.

    I hope my Senator will introduce legislation to keep my cable company from charging for HBO…it’s anti-consumer and anti-competitive that I can’t watch True Blood.

  • Starcher

    It’s true. The consumers Verizon cares for are the ones staying with the company. The people dropping out aren’t consumers in Verizon’s eyes, so Verizon is trying to make it painful to switch. It’s consumer slavery, and that’s wrong. Glad government is putting limits on corporate manipulations of consumers. I think it’s disgusting when people have to pay money to part with something they don’t want anymore, and that is why I don’t do contracts with my cell phone.