“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.

What is interesting here, though, are 100 percent unconfirmed hints that the next-generation iPhone will support faster 3G speeds. If this is indeed the case, it suggests that the device may run Infineon’s new SGOLD3 chipset. And if it does, that means it will be capable of supporting not just download speeds twice that of current 3G networks–theoretically 7.2 Mbps–but a five-megapixel camera and real-time video encoding/decoding with a new on-board video camera. Now that would make for an exciting summer, indeed.

One of the investments we make is to introduce new products that initially cost more because they deliver an entirely new level of value to the customer. Then we ride the cost curves down with value engineering and volume manufacturing, leaving us far head of our competitors. We have some of these types of investments in front of us that I can’t discuss.”

– Apple Chief Operating Officer Tim Cook, July 21, 2008

The media will gather tomorrow at Apple’s Cupertino, Calif., headquarters for an invitation-only event–presumably about updates to its MacBook and MacBook Pro lines. And as with every Apple (AAPL) product launch, tomorrow’s has been preceded by feverish speculation about what form, exactly, those updates will take. Among the rumors currently making the rounds:

• Apple will uncrate a new line of MacBooks whose cases are carved from a single brick of aircraft-grade aluminum.
• Apple’s refreshed MacBook line will include a machine priced at below $1000, perhaps even as low as $800.
• The new MacBooks will feature glass, multi-touch trackpads and LED-backlit displays.
• They’ll swap out Intel’s chipset–not the central processor–for Nvidia’s MCP7A, which reportedly blows the doors off Intel’s G45 in the graphics department.
• Blu-ray will be offered as an option on high-end models.
• Finally, Apple’s new line of portables will include the unmatchable “state-of-the-art new product” to which Apple CFO Peter Oppenheimer and COO Tim Cook referred earlier this year, and that product will be a tablet. Something along the lines of the “MacBook Touch” described by MacDailyNews back in July.
  

  Think MacBook screen, possibly a bit smaller, in glass with iPhone-like but fuller-featured multi-touch. Gesture library. Full Mac OS X. This is why they bought P.A. Semi. Possibly with Immersion’s haptic tech. Slot-loading SuperDrive. Accelerometer. GPS. … App Store-compatible, able to run Mac apps, too.”

An interesting spread of rumors, some quite likely, others improbable … and yet entirely plausible because, after all, it’s Apple we’re talking about. We’ll find out which of these proves true tomorrow at 10 a.m. PDT. I’ll be covering the event live, so be sure pay us a visit tomorrow.

It’s worth noting, though, that this particular rumor follows relatively close on the heels of Apple’s April acquisition of P.A. Semi, a boutique semiconductor design company that specializes in super-low-power processors. In early 2007, P.A. Semi debuted a 64-bit dual core microprocessor that the company claimed is 300 percent more efficient than any comparable chip; it consumed only 5 to 13 watts running at 2 gigahertz. That was well over a year ago–who knows what they’ve come up with since then?

So maybe Apple (AAPL) is forgoing Montevina in favor of a P.A. Semi-designed chipset. Perhaps we’re nearing the moment when Apple begins pushing its own processor innovations out into the market in concert with those it makes in hardware and software.

Or, perhaps not.