The four major U.S. wireless operators and Google Tuesday filed their responses to a Federal Communications Commission inquiry into the fees charged to customers who drop wireless service before their contracts end.
The carriers separately defended early termination fees (ETFs) as a necessary part of being able to offer discounted mobile devices and lower monthly rates while allowing operators to recoup a portion of lost revenue when customers cancel service prematurely. Google defended the "equipment recovery fee" on its Nexus One smartphone launched in January on similar grounds.
The FCC probe was initially sparked when Verizon Wireless doubled the ETF on smartphones and other high-end devices from $175 to $350 in November. The agency asked Verizon about the rationale behind the increase and how the company notifies customers about the ETFs.
The nation's largest wireless carrier in December told the FCC that the higher fee was justified not only by the cost of subsidizing higher-priced smartphones, but also the higher operational expenses required by the devices -- from advertising to running its broadband network. Verizon's reply drew the ire of at least one commissioner -- Mignon Clyburn -- who called Verizon's answers "unsatisfying, and, in some cases, troubling" in a sharply worded public rebuke.
Late last month, the FCC opened a formal inquiry into ETFs, sending letters to Verizon, AT&T, T-Mobile Sprint and Google asking about their policies and disclosure practices concerning the fees. For its part, Verizon essentially reiterated its prior response to the agency on the subject, maintaining that the increased ETF was commensurate with increased upfront costs associated with more sophisticated phones.
"In brief, term contracts with ETFs benefit consumers by enabling them to obtain access to devices at a significantly lower up-front cost, while enabling Verizon Wireless to recoup the extraordinarily expensive investment required to support its wireless network and operations and the cost of providing the devices at a substantial discount," stated Verizon's letter to the FCC.
Since its initial response, however, the carrier pointed out that it had removed 10 phones from the list of 46 "Advanced Devices" it sells that carry the $350 ETF. The $175 penalty is charged on other Verizon contract phones.
Other carriers made similar arguments, emphasizing the consumer benefits that ETFs help to make possible, including reduced pricing on high-end devices and product and service innovation. They also reiterated that customers are free to buy phones without contracts at full retail price to avoid ETFs.
"In that regard, despite the "no contract/no ETF" choices available to them, the overwhelming majority of AT&T customers choose a term plan arrangement that enables them to obtain a new handset at a discounted price," stated AT&T's letter. In contrast to Verizon, AT&T charges an ETF of $175 on all phones, while Sprint and T-Mobile impose a $200 fee across all models.
The wireless operators also defended their procedures for informing subscribers about ETFs as transparent and extensive, detailing disclosures made through print and online advertising, checklists for sales reps, contract language and sales receipts, among other ways of providing notification.
Google acknowledged that there had been "some concerns and confusion" in relation to separate early-termination penalties charged by itself and carrier partner T-Mobile in connection with the Nexus One device sold directly online by Google. The tech giant has also made the biggest concession to date on ETFs, dropping what it calls its equipment recovery fee, or ERF, on the Nexus One from $350 to $150 earlier this month.
The tech giant faced a backlash when it was revealed that customers who canceled or downgraded their T-Mobile service plans for the Nexus One within 120 days of purchase (but after the 14-day trial period) would have to pay the $350 fee to Google in addition to the standard $200 penalty owed to T-Mobile.
Google told the FCC the ERF -- albeit lower -- is necessary to help recover the device subsidy it provides when someone buys the Nexus One with a T-Mobile contract. The company said T-Mobile pays it a commission for each new subscriber buying the phone through its online store or existing ones upgrading service plans for the Nexus One.
The commissions are then passed along to consumers in the form of discounted pricing. New T-Mobile customers can buy the Nexus One for $179 instead of the full retail price of $529 for an unlocked version of the phone.
For its part, T-Mobile still imposes its $200 ETF on Nexus One service contracts, but stated that -- as with other phones -- the fee is intended to recoup a portion of lost revenue from early terminations rather than specific equipment costs. T-Mobile's letter also stated that Google and the carrier "have made changes to further enhance disclosures regarding the ERF and T-Mobile's terms and conditions, including the ETF, as part of the Google sales process."