The Federal Communications Commission today asked each of the major US wireless carriers and Google to explain how early termination fees (ETFs) are set and imposed on subscribers, in the wake of the doubling of some fees in recent months.
The FCC’s letters to AT&T, Google, Sprint Nextel, T-Mobile and Verizon Wireless ask each of them the same 12 questions about how the ETFs are calculated, how subscribers are informed of the fees, and how monthly service charges are calculated based on whether the subscriber is under contract — and subject to an ETF — or not. Although Google is not a wireless carrier, it introduced its own smartphone this month, the Nexus One, which can be bought at a subsidized price through T-Mobile or purchased directly from Google for full price.
ETFs have come under scrutiny in the wake of Verizon’s decision to double the cancellation fee for some of its “advanced devices,” including netbooks, BlackBerry smartphones and the new Android-powered Motorola Droid, which is sold exclusively through Verizon. The Verizon Wireless ETF jumped to $350 from $175 in November.
The price of the devices is discounted for customers who sign a service contract of usually two years, but the carrier imposes the ETF if the customer wants to break the contract.
Verizon’s fee policy drew the criticism of Commissioner Mignon Clyburn, who in December criticized Verizon’s “shifting and tenuous rationale” for doubling the ETFs. Verizon, in a Dec. 18 letter to the FCC said the ETF is intended to protect the subsidy it pays to device makers in order to make the “advanced devices” affordable for consumers. But then Verizon added other reasons.
“Verizon Wireless incurs additional costs to sign up customers, such as advertising costs, commissions for sales personnel, and store costs,” it stated last month. Verizon also argued that selling costs are higher for advanced devices because it takes more time for sales and customer care representatives to explain the advanced features of the devices.
Clyburn questioned that rationale in a Dec. 23 response to Verizon: “Consumers already pay high monthly fees for voice and data designed to cover the costs of doing business. So when they are assessed excessive penalties … it is hard for me to believe that the public interest is being well served.”
Today’s inquiry follows the establishment last week of an FCC Consumer Task Force, formed “to promote cross-agency collaboration on the Commission’s consumer agenda,” the FCC stated.
Here are some of the questions that FCC asked Google and the carriers:
- What is the amount of the ETF for each service plan where ETFs apply? If there are different ETFs for different plans, what is the rationale for those differences?
- How much of a discount on handset purchase is given in return for a consumer accepting an ETF? Does the amount of the discount differ by device, and if so, how?
- Do monthly service rates and terms differ: (1) between customers who assume a term commitment and accept an ETF, and those who don’t, and (2) between customers who purchase an unsubsidized device (either from your company or a third party), and those who purchase a subsidized device? If so, how do they differ, and what is the rationale for the difference? Can customers easily determine the impacts of their decisions [on] their rates and terms?
- How long is the trial period during which consumers can cancel their service without an ETF penalty? If they cancel, can they return the handset?
- Press reports and public statements from wireless companies have attributed ETFs to several different factors. What is the rationale for your ETF(s), and how specifically do the structure and level of those ETF(s) relate to that rationale?
An AT&T spokesman, John Britton in San Francisco, said the company hasn’t yet responded to the FCC letter but added that AT&T has not raised its ETFs from $175. He added that ETFs are prorated to drop by $5 a month throughout the contract term; Verizon’s ETFs are also prorated. Finally, Britton said consumers can avoid ETFs by paying full price for the phone and pay month-to-month for service, or bring in a phone they already own and activate it with a SIM card to run on AT&T’s network.
Sprint Nextel imposes a $200 ETF, which declines by $10 a month after the first six months of the contract. It also doesn’t impose a higher ETF on an “advanced device,” said spokesman John Taylor.
Though it hasn’t yet replied to the FCC letter, “We have nothing to hide,” Taylor said. “We have the most consumer-friendly policies on early termination fees in the industry.”
Verizon declined to comment.