Verizon Wireless; "Our early termination fees (recently doubled) are fair and reasonable" FCC thinks not

Earlier this month the FCC, no longer quite as supine and telco-boss-friendly as it used to be in the days of the George W Bush administration, set up an investigation into why Verizon Wireless overnight doubled (to US$350) the Early Termination Fee (ETF) applicable to some of its customers who want to cancel smartphone contracts.

Over the past few years we have seen the length of mobile phone contracts rise inexorably from the single year that used to pertain in almost all cases to 18 months and then to two years. The fact of the matter is that operators and service providers want their subscribers to be locked-into a contract for as long as possible as they strive to drive up average revenue per user (ARPU) and average margin per user (AMPU) and so make what they deem to be a reasonable return on the investment made in handsets and the cost of marketing, advertising, rolling-out and maintaining services.

However, as countless surveys and endless pieces of research have shown, consumers have next to no brand-loyalty where cellular is concerned and will churn-away to another service provider if they perceive there's a better deal to had elsewhere - as there often is.

Hence the determination of carriers and network operators to impose ever-longer contracts on subscribers and to hedge them about with codicils and small print terms that make it both difficult and expensive for customers to move off to a competitor - until they have done their time.

In some ways this is fair enough, but, the FCC believes (as do many subscribers) that a sudden, unannounced doubling of an early termination fee is a step too far.

Verizon Wireless's curt response the the FCC's demand for an explanation for the price hike certainly won't make the carrier any new friends in washigton DC.. In a letter to the Commission, Verizon writes, "This ETF structure is fair and reasonable. Verizon Wireless still incurs a financial loss from early terminations, even with the $350 ETF." That's it.

Full stop.

The trouble is that Verizon Wireless conspicuously failed to adduce any evidence or financial data for this contention other than to trot-out the hoary old turkey that "the overall cost for providing and supporting devices to customers at a low upfront price has increased substantially." Maybe it has, but where's the evidence?

Where Verizon Wireless may well have shot itself in the foot is by adding the comment that the Early Termination Fee does not merely cover the wholesale price of a smartphone over the length of an individual customer's contract period, but also compensates Verizon Wireless for "all the costs and risks of providing service, which include advertising, commission, store costs, and network costs."

Unsurprisingly, the media and US consumer groups say these words are prima facie evidence that Verizon Wireless is deliberately imposing unfair penalty fees and is using them to deter consumers from churning-away to another, rival, carrier.

In a statement the influential public interest organisation, Free Press said, "Verizon is blowing smoke at the FCC's attempts to protect consumers from their unfair billing practices. The bottom line is that FCC needs to spur some real competition, which will lead to lower device prices and more choices."

And Verizon Wireless would certainly seem to have some more explaining to do - such as, for example, why a subscriber now wanting to terminate his or her service agreement 23 months into a 24-month smartphone contract would still have to pay an ETF of $120.

It works like this. In common with other US cellphone service providers Verizon Wireless ameliorates its early termination fees on a pro rata basis. In the case of smartphones this sum is $10 per month - so where the newly-doubled smartphone ETF of $350 is concerned, with just one month left on the contract a subscriber wishing to leave four weeks early would still be stung for $120. It is therefore blatantly evident that Verizon needs raise its pro rata diminution accordingly. However, the chances of it doing so voluntarily seem to be close to zero - in which case the FCC needs to show not only that it has found its teeth but also that it is prepared to use them.