Is Verizon’s New Early-Termination Fee Anti-Consumer?
by John Paczkowski
Posted on November 6, 2009 at 11:06 AM PT
Beginning Nov. 15, Verizon subscribers looking to get out of their smart-phone contracts early will pay $350 for the privilege. That early-termination fee is double the current one, but Verizon insists it’s justified because of the higher prices of today’s phones.
“The cost of smart phones is considerably higher than feature phones for which the early termination fees were created years ago at $175,” said Verizon spokesman Jim Gerace. He added that the new $350 ETF declines by $10 per month through the life of the contract and customers can avoid it by buying their devices off contract and paying full retail price.
An interesting move for Verizon (VZ), which just last year agreed to pay $21 million to settle a class-action lawsuit filed by California consumers over the very early-termination fees it is now increasing. The plaintiffs in the suit alleged that Verizon’s ETFs were illegal under California law and that they were designed to unfairly lock consumers into long-term contracts and prevent them from switching carriers. When Verizon settled the suit, it denied any wrongdoing, insisting that early-termination fees are simply a means of recovering legitimate costs. And to some extent Verizon does have a point.
Full retail price for the Motorola’s (MOT) new Droid is $559.99. With a two-year contract, Verizon sells the handset for $199.99. Theoretically, that’s a $359.99 subsidy (I have no idea at what price Verizon purchases Droid from Motorola). So if Verizon allowed subscribers to break their contract after a month without paying an early-termination fee, the company would stand to lose money. And subscribers who did so could subsequently sell the device online and potentially make a profit, though a small one.
So it’s certainly understandable that Verizon and other carriers want to protect the subsidies they dole out for these new smart phones. And as noted earlier, Verizon’s new ETF drops by $10 each month a subscriber remains under contract. But at this rate, subscribers are still bound to pay a $110 termination fee in the 23rd month of a two-year contract. The contract is nearly over, the subscriber obligation to Verizon almost fulfilled, yet the company can still slap its customers with nearly a third of the full ETF if they break it at that time.
By month 23 of a two-year contract, does Verizon really stand to lose $110 if subscribers decide to switch carriers? Doesn’t seem likely if subscribers can walk away just a month later without consequence, taking their handsets with them.
Since Verizon is pro-rating the ETF, why isn’t it doing so in such a way that it zeroes out by the end of the contract?
And isn’t the fast pace of innovation in the smart-phone sector such that prices–for both component and device–are dropping so quickly that high ETFs aren’t really justified? Remember, you can get Apple’s (AAPL) iPhone for $99 today. When the iPhone debuted in 2007, it commanded a price of $499/$599, depending on model.
I’ve put those same questions to Verizon and will update here when I hear back. In the meantime, here’s what Consumers Union policy analyst Joel Kelsey has to say on the matter: “When people want to switch wireless services, the biggest cost they face is early termination fees. These fees are designed to lock people into long-term contracts and stop them from getting better deals. Early-termination fees make the marketplace less competitive. Verizon’s move is painful proof that it’s time for lawmakers to crack down on these fees.”
UPDATE: Verizon Wireless spokesperson Nancy Stark offers the following answers to the questions I posed above:
Your first question regarding the balance at month 23 or 24 assumes that, at that point, we have recovered all of our subsidy and up-front costs for every device. That simply is not so.
On your second question, while the pace of innovation plays a role in prices coming down somewhat, it also plays a role in driving up costs as more and more complexity that customers want is added to phones–from premium HTML browsers to high-resolution MP cameras with optical zoom; videoplayers; music players; dual processor chipsets; WiFi; very high display resolution, operating systems such as BlackBerry, Windows Mobile, Palm, Android–ALL with the added value (vs a desktop) of mobility, and ALL in one tiny device that ALSO allows you to talk to anyone from anywhere. phew! (by comparison, I recently paid $200 for a camera and all it can do is take pictures, and it has only middle of the road capabilities.)
But getting back to ETFs specifically. The most important point is that Verizon Wireless customers do not have to have an ETF at all if they do not want to. ETFs allow customers to have it either way: They can have no ETF and pay full retail for their device. OR, they can get a greatly discounted device by having an ETF.
Comments
This an ominous sign in the likely ongoing negotiations between Verizon and Apple regarding whether or not Verizon gets the iPhone. I’d better get out of my Verizon contract now…
Posted by Danny Miller at November 6th, 2009 at 12:13 pmI thought the Verizon policy is nothing new. I bought a blackberry 2 years ago and it has the same sliding scale of early termination fee. Also could you also touch upon the activation fees with phone carriers. What’s with the $30-$40 fee to “activate” a phone. Isn’t that steep to push a few buttons?
Posted by Atul Arora at November 6th, 2009 at 12:38 pmThere are two reasons why Verizon’s and other wireless companies’ early termination policy is anti-consumer. First, we are paying a full retail price that is arbitrarily determined without any competition. Verizon is probably paying much less than the MSRP for Droid. Any electronic gadget usually sells for 10 to 50% below their MSRP when there is competition among sellers. Second, even after paying the full price, we are tied to Verizon network because the phone is locked. If we decide not to continue with Verizon after two year contract, the phone becomes usually worthless piece of junk, as I learned from my Palm Treo’s purchase.
It’s amazing that wireless companies have been able to get away with these anti-competitive behavior for so long.
Posted by Sanjay Shah at November 6th, 2009 at 1:18 pmMaybe I was wrong – see AppleInsider report…
http://www.appleinsider.com/ar....._2010.html
Posted by Danny Miller at November 6th, 2009 at 2:58 pmEverything about Verizon is anti-consumer. Duh. That’s why they have hardly any consumer customers.
They are setup to deploy fleets of Blackberry to companies, not sell individual devices to consumers. That’s why they thought it was OK to build a proprietary 3G network that can’t run 99.9% of the world’s handsets. They wanted to lock fleets of devices to their own network, not sell the latest hot phone to a consumer.
Somebody was just telling me yesterday how his work provides everyone with a free Verizon Blackberry, but when he goes to meetings, everybody is doing their company email on their iPhones. It reminded me of how most Mac users pay for their own Mac but most Windows users are issued their PC by someone else. Blackberry and Windows have all these features to please I-T and corporate buyers but almost nothing for the actual user, nothing for consumers to buy for themselves.
Posted by Fred Hamranhansenhansen at November 6th, 2009 at 5:53 pmVerizon has the right to price their phones up to the MSRP, and collect full payment:
In a free enterprise economy, companies should be free to charge whatever they want for a product, and people should be free to obtain that product from any company or person they want. Verizon has every right to provide their customers with the option to pay for the product in full or have the price of the product prorated over time, be it two or three years. If the customer decides to leave Verizon’s network, they should be held responsible for paying the balance of the cost of the phone. Isn’t that how business is conducted in America?
Once the customer pays for the phone in full, the phone should be unlocked:
If a customer leaves Verizon’s network, they should be obligated to pay the balance of the phone. No free ride, it is how business is conducted in America. If you owe money to a bank, and you decide to close your account after two years, should all of your outstanding loans (or debt) be forgiven? Business is generally conducted based upon mutually accepted agreements, which both parties are required to adhere to. The customer’s purchase should also be protected. Verizon should unlock all phones that are fully paid for. Likewise, the customer should be able to sell their phone to either a new or existing Verizon customer who should be allowed to activate the phone at a cost that is not greater than Verizon’s current activation fees.
Who wins in these scenarios?
This is a win-win situation for both Verizon and her customers. Verizon get’s to recover the full cost of the device if the customer leaves, and the customer gets a highly sophisticated, functioning device that has most of its core functionality, less the voice/data plan. If the device is a smart phone that has Wi-Fi internet access built-in, it must be unlocked and fully functional after the contract ends or is terminated (if it is fully paid for).
Posted by Andrew Augustine at November 6th, 2009 at 7:37 pmVerizon’s Terms of Service says that you can get out of your contract without the early termination fee if changes in the TOS constitute “material hardship”.
Considering that Verizon will have to change the TOS on 15 November, I am going to say that the doubling of the ETF is a material hardship. The TOS does not define the term, so Verizon cannot determine what constitutes a material hardship for me.
Thoughts?
Posted by Jeff Waggett at November 7th, 2009 at 9:40 amMs. Stark, then by that logic Verizon should a policy plan whereby the consumer pays less money each month if there is an unsubsidized phone purchase a la T-Mobile.
Posted by Craig Veresh at November 8th, 2009 at 8:19 amThat isn’t too bad, I was with rogers here in Canada, and they want me to pay a $500 Early-Termination fee and that’s with 2 years left out of my 3 year contract.
Posted by mike skorniewski at November 8th, 2009 at 8:49 amI don’t see what the problem is. You have the CHOICE of either a contract or a retail phone. Don’t want the contract? Shell out a few extra bucks. Otherwise, sign the contract.
Why should Verizon offer the phones at a loss if you can cancel it and keep the phone?
Posted by Andrew Wells at November 8th, 2009 at 9:48 am@Andrew
Because in my case, I’ve had to return my Omnia 3 separate times over the first 7 months of my contract. Verizon will not replace it with anything other than an Omnia unless you return it 3 times in 90 DAYS. My current Omnia is now acting up, too — it is unreliable. I know it was made by Samsung but Verizon’s obligation includes actually being able to USE their vaunted network.
Posted by Jeff Waggett at November 8th, 2009 at 11:45 amhmm seems my comment was erased – ok will try again.
I think it is not balanced how WSJ reports on VZ versus AT&T and Sprint. If either of those raised it’s ETF, Mr. Paczkowski would be all over them.
Both Sprint and AT&T subsidies their phones. How much do you think the subsuidy is for an iPhone or a PRE?
Posted by tony orangeman at November 8th, 2009 at 7:23 pmHere’s an idea Verizon, don’t treat your customers like garbage and improve your network so people don’t want to leave. This is just a sign that Verizon is bleeding customers like mad and they’re trying to keep them by trying to charge a ridiculous fee to leave. Verizon is the worst cell company of them all (yes, I’ve been with them all).
Customer service – POOR
Signal Strength – FAIR
Billing – POOR
Stability of Service – POOR
God forbid you ever have to call them for anything other than a simple question that their dumbest tech can answer.
This hike in ETF is just proof that VZ has no idea how to retain customers. They spend all their money on getting new customers with crappy tv ads and propaganda then once you’re in you realize what a crappy service/company it is.
Posted by phil light at November 9th, 2009 at 6:32 amIs it any wonder why I won’t switch to Verizon for any reason?
Can you hear me now Verizon? They’re out of their minds.
Posted by Eric Welch at November 9th, 2009 at 8:02 amPhil – i am surprised that John didn’t come out and defend Verizon in response to your post.
Posted by tony orangeman at November 12th, 2009 at 4:27 pm