To Avoid Billions In Lawsuits, Cellphone Companies Propose Tepid Early Termination Fee Reform

In exchange for amnesty from a series of potentially billions of dollars in class action lawsuits over early termination fees (ETFs), the cellphone companies have proposed some namby-pamby ETF reforms to the FCC. Their ideas:

  • Pro-rating early termination fees, so the cancellation fee goes down every month
  • Customers can cancel without ETF up to 30 days after singing contract, or 10 days after receiving their first bill
  • The overall fee would be slightly reduced

Cellphone companies main justification for early termination fees is that they have to recover the costs of selling cellphones at a discounted rate. True, but why then do I get charged an ETF if even if my cellphone was bought off eBay?

A cellphone manufacturer may charge the cellphone company $500+ per phone, but does it have to? Has anyone looked at whether the price reflects the real production cost? I’m not just making an argument here, I really am curious. Whether this model came about by malicious design or fortuity, the result is legal way to prevent consumers from exercising consumer choice and punishing companies for poor service. Early termination fees are the only reason why the entire cellphone service industry gets away with having below average customer satisfaction scores.

Proposal may ease cancellation fees for cell phone users [AP] (Thanks to Tom!)

(Photo: R80o (Mark Strozier))

Comments

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  1. B says:

    Since AT&T requires two year contracts for an iPhone, despite the fact that the customer pays the full cost of the phone, I think the contract/EFT model is just to keep the customer from leaving.
    Also, the price has nothing to do with manufacturing costs, it’s controlled by supply and demand. If customers were buying phones directly instead of through subsidies with the providers, that would drive down the costs.

  2. ianmac47 says:

    How about 30 days notice and all contracts are terminated without any fee. In essence, the fee is one month’s service fee.

  3. Southern says:

    [i]Customer can cancel without ETF up to 30 days after singing contract[/i]

    Might want to spell-check that. :)

    But does that mean that someone can get a free phone and then cancel (without ETF) in 30 days? That would cost the cell phones companies a fortune in free cell phones. :(

  4. MPHinPgh says:

    Can you, in fact, purchase a new, unlocked phone through someone other than the cell service provider?

    This is not meant to be an argument. I honestly don’t know.

    And if you can, is there any benefit to buying your phone from retailer “A”, then going to service provider “B” and saying “here’s my phone, I want service.”? It already sounds like you’re stuck with the same ETF, so maybe not…

  5. Parting says:

    If you buy your cellphone from eBay, why would you sign a contract?

    @ianmac47: Then you wouldn’t be able to secure sweet deals on the phones. No company would give you 400$ rebate, when they know you can leave in a month.

  6. evslin says:

    @Southern: I imagine cancellation without an ETF would be contingent upon returning any equipment you got for free or at a discount.

  7. SaveMeJeebus says:

    I have too much dignity to sing for my contract.

  8. nrich239 says:

    @Southern: If you use the 30 day rule on a free phone, you have to turn the phone back in. I went through this with ATT (way back before cingular). There was no service at my house even though they said there was so I had to turn the phone back in and was able to get a refund for all my accessories as well.

  9. @Southern

    I think he spelled singing perfectly ;)

  10. Ben Popken says:

    @MPHinPgh: Yes, eBay and many other sites.

  11. satoru says:

    The reason these places charge ETF fees is because Americans are too cheap to buy their phones at full price.

  12. zentec says:

    How about I can get service without a contract? Verizon requires me to “upgrade” to their new service terms, which oddly enough requires a two year obligation, if I want to change or add minutes.

  13. Jaysyn was banned for: http://consumerist.com/5032912/the-subprime-meltdown-will-be-nothing-compared-to-the-prime-meltdown#c7042646 says:

    @satoru:

    Personally I just don’t care too much about a cellphone as long as I can actually make calls on it.

  14. cerbie says:

    @MPHinPgh: yes, and no. Yes, you can get the phone, but then they’ll insist on a contract for the SIM, rather than charging a one-time high price for it.

    *sigh*

    Worth it, though, to not have the AT&T Mall selected when I hit my menu button :).

  15. ARP says:

    They’re doing the same thing that all industries do when you try to regulate them, complain that it will put them out of business. It’s funny, almost every time, they manage to stay in business and do just fine. There are plenty of ways to do this.

    1) require that you return equipment if new.
    2) Pay full price for equipment in exchange for a 30 day cancellation.
    3) Pro-rate equipment costs. So, if I keep my phone and contract for a year, I have to pay for X% of the phone.
    4) BYOP (bring your own phone) and cancel with 30 days.

    I’m not opposed to a nominal cancelation fee (e.g. $20) if I were to cancel, but the $150+ fees are stupid.

  16. ottergal says:

    I work for a cell phone carrier and, back in the day when I was in the know about these things, the number crunchers had figured out that we didn’t make any money off of a customer until month 7 or 8 (if I remember correctly). Of course, this was back in the 12 month contract days – when you got a better phone/monthly rate plan if you did sign up for a 2 year agreement. Now-a-days, I think it’s more of a “lock ‘em in” mentality.

    Fairness of an ETF aside, how is this any different from any other penalty for breaking a contract? I’m not advocating for these fees – it’s an honest question.

    I think there has to be a middle ground. I predict that people will see higher rates and more expensive handsets if customers aren’t held to any sort of early term penalty and can leave whenever they want to. Then people will bitch about that… it seems like there should be a compromise somewhere that makes people responsible for their committments and yet doesn’t rape them for leaving a bad business relationship.

  17. Southern says:

    Not all cell-phone providers have an ETF, either, but all the national ones do. Smaller Regional/Local cell phone companies like Cricket, Metro-PCS, and I think Boost Mobile (?) don’t even have ETFs (but then you can’t get a discounted phone from them, either).

    ETFs are all about keeping customers. in the past, if you had a company for a year, and everyone had that phone number, you HATED switching companies because you’d have to get a new number, etc. If you only had the number for a week or two, switching wasn’t that big of a deal, but the ETF “made” you keep it anyway.

    That’s one of the reasons why they hated the number portability issue, because it pretty much opened up the floodgates for people to try different companies without having to get a new number, so lots and lots of people switched companies (I was one of ‘em.. Was with T-Mobile for 8 years and as soon as I could switch and take my number with me, I did.)

  18. Burgandy says:

    The numbers they spew at the drones,er, employees, at the cell phone companies is that they don’t start making a profit from a post-paid customer until at least the 4th month. The first three months they are basically recouping the advertising, rent, electric, etc… Its longer if they give you a good deal on a new phone. Damn I am glad to no longer be a drone!

  19. dragonfire81 says:

    When I worked at Sprint they had 1, yes ONE calling plan that required no contract and it was a pretty crappy plan. If you wanted one of the regular plans, you had to sign a contract, even if you paid full price for the phone.

    And yes, you were charged $200 to break it early.

    Cellphone providers in my opinion use contracts and ETFs to hold customers hostage.

    Think about it, you are 13 months into a contract and a have a bad CS experience and want to cancel, but you can’t afford the $200 so you leave the line intact. Several months go by and you forget about the bad experience, a good offer comes around and you accept it an extend your contract.

    If there were no ETFs, you would have cancelled at the 13 month mark, but because that fee was holding you back, you didn’t.

  20. kc2idf says:

    @B:

    Since AT&T requires two year contracts for an iPhone, despite the fact that the customer pays the full cost of the phone

    Stop there.

    AT&T pays Apple a premium of $18/month for each iPhone that they serve, making the price (or at least what Apple collects) more well over twice the sticker price.

  21. jamar0303 says:

    Um… why aren’t subsidies given based on a sliding scale? Logic would dictate that the more you pay per month the bigger the profit, and thus the better phone you can get for free (because of increased money). Why isn’t this true of the States?

    And prepaid- why on earth isn’t there a decent GSM prepaid service with reasonable data rates? AT&T prepaid data costs about as much as international data roaming to the States with my China Mobile SIM.

  22. mike says:

    Most carriers now offer a monthly “pay as you go” plan. Their phones suck, but theoretically, you should be able to take your current phone and just go monthly with it.

  23. samurailynn says:

    I hate cell phone service contracts. I would rather just pay full price for the phone up front.

  24. Pro-Pain says:

    @samurailynn: I agree. I would pay full price for a phone is a SECOND to not have to worry about a contract.

  25. MCShortbus says:

    I heard something about this on NPR and as much as it pains me to say it…They write the contract which you sign. A contract is a binding legal document, just like a property lease. If they violate the terms, you have the right to break the contract with no termination fee, but if you break the contract without just cause they have every right to hit you with the fee which they put into the contract. If you don’t like a contract, don’t sign it. Simple as that.

    Turn the table, what if you were in a lease and your landlord terminated the lease without cause, wouldn’t you feel like you deserve some sort of compensation for that?

  26. Buran says:

    How about “ignore rulings, wait for FCC to fine you, then whine that the FCC doesn’t have the authority”?

  27. Buran says:

    @MCShortbus: However, it’s a contract of adhesion and you don’t have a choice. Your assumptions are based on actually being able to negotiate the deal you get.

  28. ottergal says:

    @samurailynn:
    @Pro-Pain:

    Have you tried doing this? I will admit it’s been a long time since I’ve signed up for new service but I upgrade my handsets every couple of years and either pay more for a 1 year contract or buy at retail with no extension.

    Just because they don’t advertise it doesn’t mean they don’t offer it.

    @Buran:

    But you know what you’re signing up for when you sign.. you always have the choice to not buy the product. I also don’t see what the real difference between this and any other type of contract really is. After all, I didn’t get to negotiate my rent when I got my apartment…

  29. Uriel says:

    response letter from the FCC: “NO DICE SKAGS!”

  30. llcooljabe says:

    “Customers can cancel without ETF up to 30 days after singing contract, or 10 days after receiving their first bill “

    do you have to sing well in order to get the waiver?

  31. Buran says:

    @ottergal: Telephone service is not an option in 2008. We’re not talking about cable TV here.

  32. @Pro-Pain:

    Thirded! I get the free-market types in this thread, “oh, if it sucks then don’t sign it.” The problem is, if you refuse to sign a contract you can’t activate a line on a normal postpaid plan on ANY CARRIER.

    I repeat: NO CARRIER (that I’m aware of) offers you the chance to have their normal plan without signing a contract. The only way you can ever “not” be under contract is if your contract expired. But good luck then if you want to add minutes or a feature to your line. Most carriers will force you into their new and improved (read: more expensive) plan AND a contract at that point.

    Prepay plans are shit and everyone knows it. Higher prices per minute, hassles with stupid reloading codes, different phones, sky-high or nonexistent data plans, and you’re treated like a second-class citizen by the carrier.

    Prepay is for people with bad credit. It’s the ghetto of the cell market. I don’t want to be there. I have good credit, I’ve paid my phone bill on time for the past 6 years, why the hell can’t I just go contract-free???

  33. vancedecker says:

    Off topic a little, but, the reason that cell phones suck so much is that a handfull of buyers determine what cell phones will be available for the entire coutry.

    Sorry ‘free-marketers’ but government needs to step in at all levels of the cell phone industry. How much more crap will take to finally convince you people that the free market, in the case of cell phones, has failed miserably???

    So, NO, there should not be any SHAM compromise here. At this point I want justice! For myself, and for the millions of people who have defrauded by the cell phone industry.

    Are there any representatives out there who have not been bought? Does anyone believe in justice anymore??

  34. vancedecker says:

    @llcooljabe: Oh, and one more thing, most carriers already ‘promise’ this, the problem isn’t having this promise on paper, the problem is outright fraud.

    I want to know 1 person, who has signed up, and then cancelled successfully before the 30 days were up???? It doesn’t happen, it’s a sham, get through your thick skulls.

  35. cac67 says:

    @vancedecker: I want to know 1 person, who has signed up, and then cancelled successfully before the 30 days were up???? It doesn’t happen, it’s a sham, get through your thick skulls.

    People do it all the time. It’s no sham. My sister did it last month, but forget it. I’m not introducing a conspiracy nut to my sister.

  36. dextrone says:

    Well, the price tag on the phones is OVERLY inflated…if only people knew about the world of GOOD cellphones. You know the ones that are naturally unlocked….5 MP camera, Made in Finland, GPS, etc….
    And they cost ~500$ retail (I’m referring to the Nokia N95, but LG’s, Sony Ericsson’s, etc. regular unlocked phones are comparably better than whatever they provide the cell phone companies with here, and they’re great too, some look nicer than others though, like the top Walkman Sony Ericsson phone, 8GB and nice looks).

    And they are certainly expensive in the sense that it costs more to make them, than a phone with a FAKE price to hype up the phone…Really, Retail Price $399.99 for a phone (Motorola Z9, from AT&T) that has a 2MP camera, that’s a big trade off for nice looks….

    Now guess what, the price AFTER contract is 200$ or so cheaper….that’s not going to happen with better phones….BETTER phones = less profit

    Compare that to the UK where they essentially handout these good phones for shorter contracts (and even if you’d convert the pounds to dollars, it’s still a good deal, even with the retail price (in USD) and functionality of the phone, in this case the Nokia N95 8GB Edition). 18 months, £35 a month, and a FREE NOKIA N95 (the newer one too). 600 min/1000 text messages, though. (UK’s O2 was used in this example)

    5MP camera, GPS, and loads of other things….for free with just that, now compare to here….and see what you get….

  37. ianmac47 says:

    Here’s a simple solution: legislate away ETF and let the market figure out what to do with the cost of a phone.

  38. amw1972 says:

    Another thing to consider with these contracts is that they are NOT per account. They get you per phone. If any legislation gets passed, they should address this problem as well. One person, one account number, one contract agreement. Not one account holder 4 contracts on 4 phones for the family. IF I were to leave, I would be paying $800 which is rather ridiculous. Honestly there will come a time when it would be cheaper if I were to keep bare minimum service with this company and jump ship to someone else while I wait for my contract to expire.

  39. liquiddamage says:

    The fee needs to be prorated.
    If the fee is prorated then it continues to represent the valid expectations of the parties at contract inception -that the cell phone company had to recover the cost of the phone. If, on the other hand, as the consumer continues to pay for service, the fee does not decrease, then the cell phone company is penalizing the consumer for terminating. That penalizing should not be allowed and probably isn’t as a matter of contract law were someone to challenge it.

    So if I’m with ATT for 6 months and wish to terminate I should not have to pay the entire termination fee to stop service, I should have to pay 1/2 for 12 month term or 3/4 for 24 month term. Otherwise ATT would benefit with a windfall from those that cancel closer to the end of their contract.

    I speculate that unless your phone doesn’t work in your house or at your place of business, it takes longer than 30 days to get fed up with poor cellular service. Thus, without the pro-ration, the cell phone company actually benefits from having a network that kind of works in areas wear people live and work, but isn’t that great in other places – where people shop, drive, etc. because as we can see their profits are maximal if user frustration slowly increases to the point where they finally get completely fed up and cancel- kind of a perverse result.