What to do about wireless termination fees

Early termination fees for wireless cell phone contracts came under fire during a Federal Communications Commission hearing Thursday as commissioners examined an industry-backed proposal that could soften the blow of these fees for some consumers.

The FCC held the hearing to gather more information as it considers a proposal that would give new cell phone customers a 30-day grace period to cancel their contracts without penalty. After those 30 days, early termination charges would then be prorated or reduced over the duration of the contract.

In exchange for accepting this proposal, wireless operators have asked to be absolved from ongoing lawsuits that could cost them hundreds of millions of dollars.

Wireless operators seem to have won at least the initial battle in their legal wars over early termination fees. Also on Thursday, a California State jury ruled in favor of Sprint Nextel in the first of these class-action lawsuits.

FCC Commissioner Kevin Martin acknowledged that early termination fees, which range from $150 to $225, were problematic, stating that "in practice (it) can leave people locked into a service that they really want to leave." He even joked that his wife, who apparently is unhappy about the fees, had volunteered to testify at the hearing.

But he said he was skeptical that the class-action lawsuits would resolve issues for all consumers. And he offered his own proposal, which was similar to the industry's proposal.

Martin proposes that fees be prorated, as the industry has suggested, but he also said that the fee should be based on the cost of the phone. For example, the fee for a service with a $50 phone would be lower than one for a $500 phone, he said. He also said fees should be reasonable, and that customers should be given a suitable time period to evaluate the service before being penalized for canceling service.

Consumer advocates and state regulatory officials said that even prorating fees is not enough. Anne Boyle, chair of the Nebraska Public Service Commission, called for these fees to be abolished altogether.

"The industry should do away with these contracts and let people purchase the products on their own and pay for service on a month-to-month basis," she said. "It's the most common method for providing products and services in this country."

Boyle and other state regulatory officials also argued that states--and not the FCC--should have authority over carriers and the fees they charge. Martin argued that a single, federal policy is needed to protect all consumers, especially in states where no policies are implemented.

"Don't you think that some kind of federal rules, even if it was a floor, is better off for the consumers who have none?" Martin said to the panel during the hearing.

Operators claim these fees are to recover the cost of cell phones, which they subsidize in exchange for customers signing up for long-term contracts. And they have long argued that without contracts or fees, customers would be required to pay more upfront for phones.

"If we didn't have early termination fees, we would be here today talking about how to lower the barrier to entry for subscribers," Tom Tauke, executive vice president of public affairs for Verizon, said of during the hearing. "(The current model) has proven to be a good business model giving consumers access to the latest devices and allowing wireless companies to offer them at subsidized prices."

But Lee Selwyn, an expert on telecommunications policy and economics, testified at the hearing that the early termination fees carriers charge is roughly 12 times higher than the cost of the actual subsidy. He said that, on average, carriers are only paying about $14.33 for each phone they sell to a consumer.

He also said that carriers have overstated the loss in profit they face when customers terminate contracts early. He said that operators build their level of churn (or customer turnover) into their forecasts for capital and operational spending. Ultimately, carriers only lose about $0.70 of profit per month on customers who terminate contracts early. So for someone who still has 13 months left on a 24 month contract, a wireless operator is only losing roughly $9 in profits, a far cry from the $150 or $200 it charges customers to leave its service early.

In general, wireless operators are reacting to the public outcry over these fees by revising their service plans. AT&T and Verizon Wireless, the two largest operators in the U.S., have already begun prorating cancellation fees. And the other major carriers have said they will do the same. Some operators have also stopped restarting contracts when customers make changes to their service plans. But so far, not one major wireless operator in the U.S. has said it will get rid of early termination fees altogether.

Instead, operators argue that customers who don't want contracts have other options. Most of them offer month-to-month plans for customers who buy their own cell phones. But Boyle and Selwyn pointed out in their testimony Thursday that these month-to-month plans are often more expensive than the plans offered with subsidized handsets.

"Common sense dictates that the customer that buys his phone outright would pay a lower monthly fee," she said. "But they don't. It's the funniest math I've ever seen."

But Verizon's Tauke said consumers have plenty of alternatives to contracts, and he said that his company is moving toward giving customers more freedom and choice.

"Today if you walk into a Wal-Mart, there are lots of options in terms of prepaid phones," he said. "And (at Verizon), we are moving toward an open development system so that you can purchase devices from people not affiliated with our company."

[Imalittleteapot]

I don't know about this. Most plans have a 15 to 30 day period where you can get out of the plan anyway. I've done this before without paying any fee. They may be expensive, but it's part of the contract you sign. That's why they have you sign one. If you don't like it then don't sign it. Are you a zombie? Did someone force you to sign it with a gun? It isn't like there isn't competition. I used pre-paid for years. Many people get expensive phones for either cheap or free. These just don't fall from the sky. The company is in the business to make money. They're not there to pat you on the back and say good job son. Compared to the actual phone bill I don't think they're expensive at all. To pay $150 or $250 to get out of a $2000 or $3000 contract. That sounds like a deal to me. I'm just happy there is a way to get out of the contract at all. Maybe a better idea would be to focus on a free way out in case of medical disaster, loss of job, or horrible service. If someone just wants out because they bought something they couldn't afford, and they don't want to keep their promise anymore then I say just let them pay it. Teach them a lesson about how to save their money in case they have a bad day and want to get out of their contract. You really shouldn't even have to sign a contract. Wireless billing should work just like landline billing. If you don't pay they shut you off. When you feel like you want a phone again you start paying. However, as long as they do contracts then you'd better read it before you sign one, and do what you promised to do.

[brettotte1]

If you pay full price for your phone at Verizon the monthly fee is no different than if you had a contract. Who is charging higher fees?

[Kings X Rocks!]

as long as you stay with the carrier, they won't hit you with term fees if you want to move to a new device (and contract). they may balk about it, but they will do it.

i agree with lmalittleteapot above...if you don't like the contract don't sign it. yes, you won't be able to get than brand spanking new iblackberrytreophone but it's your decision.

if you sign and then decide to switch carriers, it ain't like you didn't know if was part of the deal, right?

[krismae76]

I think the point is that the cancellation fees are exorbitant. There is no reason they need to be that high, except to lock people into a service that they might regret later. There are other reasons someone may choose to switch carriers besides not being able to afford it. I, for one, have had unusually bad expereriences with both AT&T and Verizon and would have liked to get out of my contracts, but felt locked because of the fees. I eventually filed a complaint with the BBB over Verizon's actions on my account, but I could not justify paying them $175 to cancel my contract. It's like rewarding them for doing their job poorly! I feel like these big companies lock you into a contract, and then they have you where they want you. And, let's not deceive anyone here, the "pay as you go" phones do not provide the same functionality that you get with the contract phones. Not to mention, they are not as economical as a contract phone if you are using one as your main line.

[Penguinisto]

I certainly wouldn't mind seeing a reduction in termination fees, but IMHO the big one to go after is the habit carriers have towards extending your contract whenever you change or modify your plan. In 2005 I got a divorce, which meant that I had no use for a two-phone plan anymore. T-Mobile refused to allow me to ratchet it back to a one-phone plan (even at the same price range) or to break it up into two separate plans - without tacking on two more years of additional contract time. I even had to claim a lost SIM chip and pay $20 to basically get the ex-wife's phone de-activated (she'd promised to turn the phone over and get her own, but instead racked up some hellishly high charges on it. Gotta love the exes...). Any little thing you wanted to do with your service, like upgrade the phone to another model, cost you the price of the phone + another year of contract time. I eventually broke away from the whole mess and now don't even bother. I'll likely get a cell phone, but only a no-contract flat-rate plan (e.g. Cricket) with a phone that I buy.

[jeniferc]

Unfortunately, I ended up spending a little over a year with a carrier I didn?t like. The reason I didn?t like my carrier was because I was billed for 3rd party text messages that were not approved and had to fight for several months for a billing correction, but that is a whole other topic that wireless carriers should be focused on improving.

I had hoped that Cricket?s no contract would help reduce the wireless market?s contract requirements. I was shocked to see 1 year contracts change to 2 year contracts several years ago. I believe customers should have the freedom to change providers without contract termination fees. I would gladly pay for my phone to have the flexibility of a month to month plan (and hopefully a reasonable price). I am glad to see this article point out the real average cost that most wireless carriers are paying for the phones they are selling. It is hard for me to believe that there is any real barrier to have a cellular service without early termination fees.

[jeniferc]

Unfortunately, I ended up spending a little over a year with a carrier I didn?t like. The reason I didn?t like my carrier was because I was billed for 3rd party text messages that were not approved and had to fight for several months for a billing correction, but that is a whole other topic that wireless carriers should be focused on improving.

I had hoped that Cricket?s no contract would help reduce the wireless market?s contract requirements. I was shocked to see 1 year contracts change to 2 year contracts several years ago. I believe customers should have the freedom to change providers without contract termination fees. I would gladly pay for my phone to have the flexibility of a month to month plan (and hopefully a reasonable price). I am glad to see this article point out the real average cost that most wireless carriers are paying for the phones they are selling. It is hard for me to believe that there is any real barrier to have a cellular service without early termination fees.

[zanberdo]

Marguerite Reardon,

I have been reading your earlier blog entries and was hoping you might elaborate on what you wrote back in Oct., 2007 about AT&T announcing that it will prorate the early termination fee. I'm curious to find out when AT&T took action and who would benefit.

Specifically I was an AT&T custom until Dec 7, 2007 when I canceled a two-line contract. I had recently moved to an area where coverage was horrible and for over a year I tried to resolve this poor coverage. I finally relented and canceled the contract, thus incurring the $350.00 ETF.

After reading recently news about FCC involvement and class action suits, I came across your blog from Oct. 2007. I then contacted AT&T and asked about this. The representative I spoke with stated that the reduced ETF (she denied it being a proration) was only effective for new contracts signed after May 25, 2008. She further claimed that there was no public information available about this, save for the text of the contract. She wrapped up by stating that the only way I would see a contract would be for me to sign up for service.

I doubt the last statement: I'm fairly certain I could get a contract and read it without signing up for service. However, it disturbs me that several blogs regarding this matter appeared back in October 2007 yet I can't get any information from AT&T directly.

I would appreciate it if you could post some additional information regarding what you know and any links to any information from AT&T that might help to shed some light on this subject. If I'm eligible to receive some sort of proration/reduction/rebate of the $350.00 I had to spend to get out of a contract with a service provider who was not providing usable service (this last bit is snarky and irrelevant) then I'd like to know how to pursue it.

Thank you.

[zanberdo]

Marguerite Reardon,

I have been reading your earlier blog entries and was hoping you might elaborate on what you wrote back in Oct., 2007 about AT&T announcing that it will prorate the early termination fee. I'm curious to find out when AT&T took action and who would benefit.

Specifically I was an AT&T custom until Dec 7, 2007 when I canceled a two-line contract. I had recently moved to an area where coverage was horrible and for over a year I tried to resolve this poor coverage. I finally relented and canceled the contract, thus incurring the $350.00 ETF.

After reading recently news about FCC involvement and class action suits, I came across your blog from Oct. 2007. I then contacted AT&T and asked about this. The representative I spoke with stated that the reduced ETF (she denied it being a proration) was only effective for new contracts signed after May 25, 2008. She further claimed that there was no public information available about this, save for the text of the contract. She wrapped up by stating that the only way I would see a contract would be for me to sign up for service.

I doubt the last statement: I'm fairly certain I could get a contract and read it without signing up for service. However, it disturbs me that several blogs regarding this matter appeared back in October 2007 yet I can't get any information from AT&T directly.

I would appreciate it if you could post some additional information regarding what you know and any links to any information from AT&T that might help to shed some light on this subject. If I'm eligible to receive some sort of proration/reduction/rebate of the $350.00 I had to spend to get out of a contract with a service provider who was not providing usable service (this last bit is snarky and irrelevant) then I'd like to know how to pursue it.

Thank you.

[mikeburek]

I'm glad there are talks about this now. But this lady that wants to abolish all termination fees is being an extremist and not really helping the reasonable-fee case. Her demanding no more fees is like the phone companies requiring full fees.

[mikeburek]

I'm glad there are talks about this now. But this lady that wants to abolish all termination fees is being an extremist and not really helping the reasonable-fee case. Her demanding no more fees is like the phone companies requiring full fees.

[dritag45]

I don't think that you should have to pay to discontinue service on anything that you don't need or can't afford. Its not a matter of weather or not you want to pay for it or a lack of responsiblity sometimes situations change especially with the economy being the way that it is now. In additon to that customer service has seem to have all but deminished. It seems as though they think that as long as they have you locked in a contract they are no longer obligated to provide quality service. I currently have t-moile service and I have inquired about terminating my service twice. Both times the first thing that came out of their mouth is not how they can assist in solving my issues with them but that the early termination fee is $200. That is obviously the bargining chip that is used in keeping you as a customer. Oh, and by the way I paid full price for my phone. Its sad that a company feels the need to have their customers on a leash. I am seriously considering terminating my contract if not for anything else just to have free reign.