The Federal Communications Commission is asking all four major U.S. cell phone operators and Google to explain their early termination fee policies and how they communicate these to customers.
FCC Consumer and Governmental Affairs Bureau Chief Joel Gurin and Wireless Telecommunications Bureau Chief Ruth Milkman sent letters (PDF) on Tuesday to AT&T, Verizon Wireless, Sprint Nextel, T-Mobile USA, and Google asking them to detail how they inform customers of their fees in statements on corporate Web sites, in brochures and sales scripts, and in monthly bills.
In their letter to Google, they said the FCC welcomes new devices, such as the Nexus One, because it offers consumers more choice. But they expressed concern over Google's $350 fee charged to customers who cancel their service for the phone in the first 120 days if they purchase it with a two-year service contract from T-Mobile. This fee from Google is on top of any early termination fee, or ETF, charged by T-Mobile.
The phone costs $179 with a two-year contract from T-Mobile. And it's $529 without a contract.
"The combination of ETFs from Google and T-Mobile for the Nexus One is also unique among the four major national carriers," the FCC representatives said in their letter to Google. "Consumers have been surprised by this policy and by its financial impact."
Carriers say that ETFs are necessary to cover the cost of subsidizing phones. Critics say they simply stifles competition and are used to generate revenue. Several class action lawsuits have been filed over the issue. And Congress and the FCC have looked into the issue. Operators have responded to the pressure. And today every major wireless carrier in the U.S. prorates its ETF so that the fees decrease over the life of the contract. Operators are also now offering cell phone subscribers the option to buy phones without a subsidy and no ETF.
Wireless operators have already settled several of the class action lawsuits. In a separate notice Tuesday, AT&T via e-mail informed its customers that it had settled a class action case in the U.S. District Court for the District of New Jersey. A settlement has been reached for a class of customers who were charged a flat-rate ETF from January 1, 1998 through November 4, 2009, or to customers whose contract included a flat-rate ETF provision at any time after January 1, 1998.
In November, Verizon Wireless announced it was increasing its $175 early termination fee to a whopping $350 for "advanced devices," such as smartphones. And in early December, the FCC sent a letter to Verizon asking the company to explain why the new fee is necessary and how it will be implemented. Verizon has provided some preliminary answers. The FCC hasn't made any official comments on Verizon's answers, but early indications suggest the FCC isn't satisfied with Verizon's initial answers.
"Verizon's response to the FCC [on early termination fees] has raised more questions than it has answered," FCC chairman Julius Genachowski said last week during a press briefing at the 2010 CES trade show in Las Vegas. "What strikes me is that there is a very real level of consumer confusion around these fees."
AT&T said in a statement that it "welcomes the opportunity to explain to the FCC all the choices available to consumers." And CTIA, the trade association that represents the wireless industry, said it "agrees with the FCC that transparency and disclosure is very critical and that consumers must understand the terms of their contract."
But the group defended early termination fees as "part of the rate and rate structure that allows wireless carriers to, among other things, subsidize phone purchases."
The wireless companies and Google have until February 23 to respond to the inquiry. Google representatives were not immediately available for comment.