updated 05:05 pm EST, Fri December 18, 2009
Verizon says ETFs due to smartphone price
Verizon today provided its anticipated response (PDF) to the FCC's inquiry about its sudden hike in early termination fee (ETF) rates for smartphones. The carrier insists that the higher prices of phones like the Motorola Droid are too high to leave the cancellation fees at their regular $175, as it would take a significant loss if a customer with "advanced device" were to quit but only pay the previous one-size-fits-all rate.
It also says the relatively mild prorated fee, which still costs $120 with just a month left in a contract, is necessary. Many of those who buy phones like the Droid would still result in a loss without the extra month or more of service charges. A customer who leaves halfway through a two-year plan typically costs Verizon about $460, according to the letter.
Other arguments in the notice insist that Verizon needs more guaranteed revenue from these users to support the costs of maintaining and upgrading the 3G network to support heavier data use, and that the FCC itself in 2003 believed carriers had a right to recoup the up-front money spent on the phones if a customer left early.
On frequent complaints of $2 fees for accidentally launching the web on non-smartphones, Verizon deflected concerns by claiming that no fees are charged when visiting the default Verizon page, though this contradicts statements from some of its own subscribers.
It's not entirely clear if the claims will satisfy the FCC as the pricing of phones doesn't necessarily correlate to the claimed losses. The $350 ETF for a Droid almost exactly matches the price difference for a Droid between its two-year and contract-free options and, in theory, should significantly reduce the ETF towards the end of a contract. Also, the $560 price of a Droid off-contract is retail and assumed to be above the actual (if undisclosed) direct cost paid to Motorola.
The investigation has brought intense scrutiny on to not just Verizon but the entire US cellular industry. Advocates both inside and outside of government have attacked the carriers for allegedly abusing ETFs to "trap" customers into contracts by making it prohibitively expensive to leave should the customer be unhappy with the quality of service after an initial trial period. Critics began paying greater notice to the issue after demand for the iPhone highlighted the ETF as a price of switching carriers to get the Apple handset.
Minnesota Senator Amy Klobuchar has recently introduced a bill that would ban rate spikes like Verizon's in the future, though whether it will survive to become law is uncertain.