Verizon Wireless to FCC: our cancel penalties justified, also goes to all those ads
Verizon Wireless defended today its recent decision to double penalties for smart-phone customers who leave their contracts early, telling federal regulators that it needed to do so to keep up with the rising costs of mobile devices that it is subsidizes for its users. Starting Nov. 15, Verizion Wireless smart phone customers were charged $350 for cancelling their contracts early, compared to previous charges of $150.
The letter drew immediate criticism from consumer groups that said Verizon is unfairly charging consumers for costs unassociated with the phones. Such policies, they say, deter users from switching carriers even when they move to areas without service and can add up to hundreds of dollars of penalties for households that want to terminate service, even close to the end of their contracts.
In a 77-page letter to the Federal Communications Commission, the nation’s largest mobile phone service operator said it makes up the costs of subsidizing phones like the BlackBerry Storm and Droid through service fees in one- or two-year contracts. When customers leave for competitors like T-Mobile, Sprint Nextel or AT&T, Verizon argued, it suffers losses from the discounts given for smart devices. That's the reason why they use early termination fees (ETF) to recover costs when subscribers switch carriers, Verizon said.
And the ETF goes to recover other costs beyond the phone, Verizon said:
Contrary to the implication of the question, the ETF is not limited to the recovery of the wholesale cost of the device over the life of the contract. As explained in response to Question 4, the ETF partially compensates Verizon Wireless for all the costs and risks of providing service, which include advertising, commission, store costs, and network costs.
Those costs shouldn't fall on the shoulders of its users, who aren't buying their phones to pay for Verizon Wireless' ad campaigns, consumer advocates said.
“Those are all costs that should be captured in monthly service, not given as excuses to punish subscribers who want to leave their service,” said Joel Kelsey, a policy analyst at Consumers Union.
He said Verizon doesn’t use revenues from customers who buy phones at full price and pay for month-to-month services for extraneous costs associated with administration and operations of the wireless network.
Early in November, the company quietly notified customers in letters that it would increase ETFs of advanced devices -- which include smart phones like the Storm or Droid. The move set off criticism from consumer groups, bloggers and users, who said the policy hurts consumers, and the FCC asked Verizon to explain the economics and reasoning behind the new policy. Lawmakers introduced a bill in response that would cap termination fees. And a recent federal report showed consumers are unhappy with such contract obligations.
Verizon said its early-termination policy “enables many more consumers, including those of more limited means, access to a range of exciting, state-of-the-art broadband services and capabilities,” according to the letter.
And the phone giant outlined a few ways they are trying ot protected from the fees being too onerous: Users are given 30 days to leave a contract without penalty; a user can buy a phone at full price without signing a long-term contract; and termination fees are prorated throughout the length of the contract.
But they also admitted that a customer with just one month left in a contract could pay as much as $120 to cancel their service.
"First, taking customers who terminate their contracts before the end of the
contract term as a whole, Verizon Wireless still incurs a financial loss from early terminations, even with the $350 ETF," the company said in its letter. "Were Verizon Wireless to prorate the ETF in a manner that would reduce its amount to zero in the last month of the contract, the net losses to the company would be even greater."
December 18, 2009; 4:09 PM ET
Categories: Early Termination Fees , FCC , Verizon
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