Please allow me to present a different perspective to that presented by Ryan Young, based on my own experience dealing with Verizon Wireless. The problem with early termination fees is their lack of transparency and their use by cell phone providers to (a) deter customers from changing their service; and (b) keeping their customers on the hook despite inferior rates and customer service.
I had unwittingly become a Verizon customer when my previous provider was absorbed into the Borg Collective that is Verizon. At the time, I had been with the same provider for five years. Verizon arbitrarily altered my plan, since the plan I held under my old provider had no direct counterpart under their system. At this point, they restarted my clock without telling me. I was now on the hook to Verizon for a minimum of two years, though I was unaware of this fact, since the notice I received with my change of service was written in some incomprehensible jargon (and since I frequently have to deal with defense procurement regulations in my work, I know about jargon).
About six months on, my cell phone ceased to operate, due to really shoddy workmanship. I went to Verizon to get it fixed, and was told the model was no longer supported. “What?” I exclaimed. “This phone is only eighteen month olds.” Sorry, they said, they no longer support that model, but they could either send it to the factory for diagnosis for a non-refundable $75 fee (plus any repair costs), which was more than the phone actually cost. Alternatively, they could “give” me a new phone of comparable value, it I would sign up for a new service plan with a new two year term.
Thanks but no thanks, I said. Please cancel my service immediately. I then walked across the mall to the Cingular (now AT&T) Wireless office and signed up for new and better service at lower rates (albeit still with a minimum term) and a much better phone, to boot. Here’s where it gets interesting. By shear serendipity, when Verizon cancelled my service, they also terminated my automated payment plan. So, three weeks later, I got a bill in the mail from Verizon for $275, which was my monthly $75 service fee, plus a $200 early termination fee. I called Verizon and said, “What gives? I’ve been a customer for more than five years?” The rude customers service rep coldly informed me that the date of my service began when Verizon took over my original provider, and therefore I had to pay an early termination fee. “Go pound sand,” I responded, tore up the bill, and went about my work.
After about three months, I started getting nasty phone calls from Verizon, then threatening letters. I have a thick hide, so I ignored them. Finally, they turned my account over to a collection agency, which I fended off for another three months. Finally, figuring that I had finally managed to cost Verizon more than it would be able to collect, I made an offer: I will pay my last monthly fee, but they can kiss their early termination fee and any late penalties goodbye. To my surprise, they folded, and I sent them a check for $75.
Mr. Young’s article makes a couple of false assumptions. First, he assumes that phone companies build phones. They don’t. They deliver service, and for that they have to put phones in the hands of their customers. Those phones are made by companies like Motorola and Nokia who are competing against each other to provide phones to the service providers. As such, they are constantly adding new features and driving down their costs. A top-of-the-line cell phone retailing for a couple of hundred dollars in fact costs the manufacturer about $20 to make. Development costs are no longer that steep, since the adoption of industry-wide standards and the maturing of the technology to the point that all improvements are incremental, not revolutionary.
For their part, service providers have long realized that they make their money not through phone calls (bandwidth is so abundant and the process so entirely automated that placing a phone call anywhere in the world costs—effectively—nothing, so that call minutes can simply be given away as an inducement to subscribers). Real money is made through value-added content provision: the games, television, text messaging, internet access, videos, music files and whatnot that go with the phones, for which they can charge top dollar. But to do that, they have to get the subscriber in the door, and the way they do that is by very low and attractive “introductory rates” for new subscribers, which, of course, go up after the introductory period is over. In this way, new subscribers are suckered into subscribing to features and services they seldom if ever use, for which the providers charge far more than their actual costs.
As the wireless market reaches the saturation point — where a majority of Americans own one or more wireless devices — competition among providers will shift from a fight for new subscribers (people without cell phones) to attempts to poach subscribers from other networks. As that fight heats up, early termination penalties become a critical tool for service providers, by providing a disincentive to switch, or at least to delay the switch for a period of time, during which myriad ways of retaining the customer can be devised (the simplest being to change the terms of service and slipping an incomprehensible notice into the subscribers bill that makes the change automatic unless the subscriber opts out).p>So, at the end of the day, early termination fees are not about allowing technological innovation. That’s going to happen anyway, due to market force dynamics and the competition both among providers and among device manufacturers. Rather, it’s about keeping subscribers in thrall to their present service providers and creating obstacles to the free movement of subscribers from one provider to another based on cost and quality of service. Put another way, early termination are simply a means of restraining free trade in the wireless industry.