“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.

In the consumer market, Apple (AAPL) scored 811 points out of a possible 1000, exceeding the industry average of 765. Its closest rival, LG–the only other company to beat that average, scored 776.

Apple’s performance in the enterprise market was equally impressive. The company scored 803 points out of a possible 1000. That was 79 points more than RIM, whose BlackBerry took second place with a score of 724 points, the industry average.

And what of Palm (PALM) devices and smart phones running Microsoft’s (MSFT) Windows Mobile OS? Neither had a particularly remarkable showing. Among consumer smart phone users, Palm devices scored 731, while WinMo devices from Samsung and HTC both scored 739. And among business users, Palm devices scored 688, while WinMo devices from Samsung and HTC scored 697 and 692, respectively. The study, it should be noted, was fielded between January and June 2009, so it does not account for Palm’s new Pre handset. (See charts below; click to enlarge.)

Clearly, the iPhone has gained a fair bit of traction in enterprise in a relatively short time. Who was it again who said the iPhone “doesn’t appeal to business because it doesn’t have a keyboard”?

[Image credits: MacDailyNews, J.D. Power and Associates ]

“Throughout this report we have focused on the main ‘branded’ smartphones like iPhone, Android, Pre, BlackBerry, and Treo,” the market researcher explained. “And yet there are many more smartphones in use today, manufactured by the likes of LG, Samsung, Motorola, and Nokia, running either the Windows Mobile or Symbian operating system. What’s going on with these smartphones? For one thing, many users can’t identify their operating system. While Android users know they have a phone on the Android platform, most Windows Mobile or Symbian users have no idea what operating system is running their phone.”

That’s bad news for Microsoft (MSFT) and Nokia (NOK) because not only do these “other” smart phones tend to perform the most poorly in customer satisfaction, most of their owners would like to abandon them for Apple’s (AAPL) iPhone, Research in Motion’s (RIMM) BlackBerry or the Palm (PALM) Pre.

“The ‘generic’ smartphone is unloved, unappreciated, and unlikely to encourage any devotion among its users,” CFI concludes. “Its main role appears to be as a stepping stone to a ‘branded’ smartphone….Our data indicates there is little future for the ‘generic’ smartphone. Or, to be exact, the first generation of ‘generic’ smartphones. The iPhone has clearly raised the bar, but given the performance of the initial versions of the Pre and Android, the gap is narrowing. It’s clear from our data that the Android and Pre are worthy competitors to the iPhone, and more recent versions of the BlackBerry pose a bigger threat.”

PREVIOUSLY:

• Windows Mobile 6.5 “an Amazing Engineering Feat,” All Right…
• Perhaps if They Think of Their Win Mobile Devices as Broken iPhones…
• Ballmer on iPhone: Mr. Mojo Risin’

And it’s not going to be getting one anytime soon, either, despite rumors that Microsoft is working on one and courting developers to port their iPhone apps over to it. Which is not to say that the company isn’t building an answer to Apple’s App Store–it is. Redmond is just building it for Windows Mobile, not Zune.

“We’re trying to get out of the business of building similar things in the company that don’t work together, and the Windows Mobile team is tackling the challenge of a mobile apps marketplace right now,” Zune marketing manager Brian Seitz told TechFlash. “We don’t necessarily line up perfectly with that, to take advantage of whatever ends up coming out of that from the Zune HD standpoint, but down the line if there’s a way that we can plug into what they’re doing, I’m sure we’ll look into whether that makes sense for the business.”

But by then, of course, it will be too late. Arguably, it’s too late already. As Apple gleefully noted during its annual music event last week, NPD pegs the company’s share of the portable media device market at nearly 74 percent. Meanwhile, Microsoft’s tops out at an estimated 1.1 percent.

Raising that share was already a Sisyphean task for Microsoft (MSFT), and it has only become more difficult now that Apple (AAPL) has introduced not just a new iPod nano with a built-in video camera and FM radio, but also a more inexpensive iPod touch.

Microsoft is pricing the 16GB Zune HD at $219.99 and the 32GB version at $289.99. But you can get a 32GB iPod touch for $299. And you can get an 8GB touch for $199. Now, granted, the touch offers only half the storage of the 16GB Zune HD, but it supports the iTunes App Store. And if you really want that extra 8GB, you can always buy an iPod nano, which shoots video and at $179.00, is $30 cheaper than the Zune HD.

“AT&T does not manage or approve applications for the App Store,” the company said in a statement. “We have received the letter and will, of course, respond to it.”

A flat denial, and one that would seem to throw Apple (AAPL) under the bus for denying iPhone owners access to Google Voice. Though just why Cupertino would take issue with an an iPhone application that offers free text messaging and allows users to make calls, routed via the Internet, for free in the United States and for a small fee internationally is unclear. After all, it’s not Apple’s domestic and international calling business the app is potentially encroaching on.

And AT&T (T) is being somewhat disingenuous here since it acknowledged this past May that it had SlingPlayer for iPhone black-holed from the App Store because of concerns over bandwidth.

So while AT&T may not directly “manage or approve applications,” the carrier is clearly capable of influencing management and approval of them.

Could it be that Apple is contractually bound to reject apps that might compete with AT&T’s service? An agreement like that would certainly make it easy for AT&T to adopt the hey-don’t-look-at-me stance it has taken with the FCC.

That said, it’s entirely possible that the Apple’s rejection of Google Voice apps had nothing to do with AT&T and everything to do with its increasingly complicated relationship with Google (GOOG).

As Daring Fireball’s John Gruber notes, “Google Voice is a mobile phone service provided by the maker of one of the biggest competitors to the iPhone OS. What if Google Voice were instead Microsoft Voice? And what if Windows Mobile were as modern and competitive as Android? Would you be as surprised then that Apple is discouraging iPhone owners from using the service?”

At its Worldwide Partner Conference in New Orleans this morning, the company said it will begin accepting applications for the store on July 27, with an eye toward opening it by the end of the year. When it does debut, Marketplace will be available to all Windows Mobile 6 devices, not just 6.5 (as the Windows Mobile Blog notes, that’s 30 million devices), and it will host about 600 Microsoft-vetted apps–quite a few more than Apple’s iTunes App Store offered at launch, but significantly fewer than the 65,000 apps Apple (AAPL) boasts today.

Sure, we’ll improve Windows Mobile to better compete with Apple’s (AAPL) iPhone–eventually. Sounds quite a bit like Microsoft CEO Steve Ballmer’s “we’re doing our best” remarks about Windows Mobile back in March.

As I noted at the time, “it’s all well and good that Microsoft is accelerating Windows Mobile development to better meet its competition. But that competition isn’t exactly standing still waiting for Microsoft to bring itself to parity. It lapped Microsoft two years ago, and if the software behemoth continues at its present pace, the competition will lap it again. Perhaps it already has.”

Microsoft and Verizon are reportedly discussing a touchscreen multimedia cellphone that could launch on the carrier’s network in 2010. The project, code-named “Pink,” will apparently involve some ungodly combination of Windows Mobile and Zune software. That code name is particularly interesting in light of recent reports that Microsoft (MSFT) has requested proposals for a new ad campaign for a mysterious mobile application by the same name.

Beyond that, details are slim. Representatives for Verizon (VZ)–which already has six Windows Mobile touchscreen devices in its lineup–refused to comment on the report. And Microsoft is apparently holding to the party line, insisting that its mobile strategy is to provide a software solution, not devices. Consider these remarks from Microsoft CEO Steve Ballmer at a recent McGraw-Hill (MHP) media conference:

With Windows Mobile, we want to permit a range of hardware innovation, and yet, still have a pretty good experience end-to-end, with good applications, and we want the ability for software developers to target both a very high-end and a lower range or mid-range phone.

And the ability to scale up and down, to work with multiple hardware vendors, to get a range of competition and innovation and price competition amongst the hardware guys is a big asset. It is certainly what our strategy is. It’s very different than Apple’s, and it’s very different than BlackBerry’s. But, unless you assume Apple and BlackBerry are going to sell the lion’s share of most phones … which I don’t, because I think they’re going to get a lot of competition from the Samsungs, LGs, Sony Ericssons, Taiwanese. I mean, there are a lot of guys who are going to be in that phone business.

I think that the play for us is to permit broad innovation at many price points, with a very good and very feature-rich, in terms of applications, experience. If people want keyboard input, that’s great. If they want touch, that’s great. If they, you know, want voice, we need to give them a range of modalities for interaction. And that’s the direction we’re headed with Windows Mobile 6.5 and into the future.

Ah yes, Windows Mobile 6.5. When are we going to see that again?

Ugly just isn’t going to cut it in today’s mobile device market. That’s what Dell is finding as it attempts to build a smartphone capable of holding its own against the RIM’s (RIMM) Blackberry, Apple’s (APPL) iPhone and Palm’s (PALM) upcoming Pre.

According to Kaufman Bros. analyst Shaw Wu, the PC maker’s first smartphone prototypes have been rejected by wireless network operators, which found them dull compared with current and upcoming devices. “From our conversation with supply chain and industry sources, it appears that it ultimately came down to lack of carrier interest and small subsidies, making it difficult for Dell to make a profit,” Wu explained in a message to investors, noting that prototypes running Microsoft’s (MSFT) Windows Mobile and Google’s (GOOG) Android both were dismissed by carriers for their “lack of differentiation.”

Apparently, Dell’s “nondescript and gray” aesthetic just doesn’t translate to the cellphone market.

Undaunted by such criticisms, Dell (DELL) has gone back to the drawing board in the hopes of designing a more appealing device and may even consider an acquisition to spur such efforts along. Said Wu, “Dell remains committed to the cell phone space as it appreciates the opportunity in smart phones and the longer-term cannibalization potential of PCs.”

A difficult question. It’s clear that Microsoft (MSFT) has so far failed to improve Windows Mobile to better compete with the iPhone, and with handsets using Google’s (GOOG) Android, which are slowly beginning to arrive at market. When will it close the gap?

Ballmer’s answer? We’re getting around to it.

“We have a significant release coming this year,” he said. “Not the full release we wanted to have this year but we have a significant release coming this year with Windows Mobile 6.5….We still don’t get some of the things that people want on the highest-end phones. Those will come on Windows Mobile 7 next year. Certainly I’m not, um–there’s opportunities for us to accelerate our execution in this area, and we’ve done a lot of work to really make sure we have a team that’s going to be able to accelerate. With that said, we did sell more Windows Mobile devices last year than Apple did iPhones–just an important factoid to have. Blackberry was a little bit ahead, and Google was nowhere to be seen, except in Silicon Valley, I’m sure. But we’ll do our best to help you with that challenge.”

We’re doing our best? Not the answer the questioner was looking for, I’m sure. And noting that there were more Windows Mobile devices sold last year than Apple (AAPL) iPhones doesn’t make the disparity between the two any less vast. Finally, it’s all well and good that Microsoft is accelerating Windows Mobile development to better meet its competition. But that competition isn’t exactly standing still waiting for Microsoft to bring itself to parity. It lapped Microsoft two years ago, and if the software behemoth continues at its present pace, the competition will lap it again. Perhaps it already has.

There’s no chance that the iPhone is going to get any significant market share. No chance. It’s a $500 subsidized item. They may make a lot of money. But if you actually take a look at the 1.3 billion phones that get sold, I’d prefer to have our software in 60% or 70% or 80% of them, than I would to have 2% or 3%, which is what Apple might get.”

– Microsoft CEO Steve Ballmer, April, 2007

Apple’s iPhone and Research in Motion’s BlackBerry are little more than consumer phenomena. This according to Microsoft CEO Steve Ballmer, who professes to be unimpressed by both devices. In remarks at Microsoft’s annual Strategic Update in New York Tuesday, Ballmer said that while consumers might be fascinated with Apple’s (AAPL) iPhone and RIM’s (RIMM) BlackBerry, carriers and OEMs much prefer Windows Mobile. “The truth of the matter is all the consumer market mojo is with Apple and to a lesser extent BlackBerry,” Ballmer said. “And yet, the real market momentum with operators and the real market momentum with device manufacturers seems to primarily be with Windows Mobile and Android….I think the guys who are in the best position to benefit are the guys who actually have phones at low price points,” he added. “I think that’s a distinct advantage that we have.”

An interesting market dichotomy. Too bad for Microsoft (MSFT) that the consumer market is the one spending the money. Doesn’t much matter that manufacturers would rather peddle Windows Mobile devices if their customers aren’t interested in buying them, does it? No wonder Apple recently bested Microsoft for the No. 3 spot in the smartphone operating system market.