Verizon: $350 Early Termination Fee Covers More Than Phones

Verizon Wireless says its controversial $350 Early Termination Fee does more than reimburse the cost of subsidized handsets, it covers other expenses as well.

The company today responded to an FCC inquiry over its decision last month to double its Early Termination Fee (ETF) for "advanced devices," such as the Motorola Droid.

The $350 fee has been widely criticized as excessive. Not surprisingly, Verizon disputes the claim in a written response, filed Friday with the Commission.

In its response, Verizon reveals that its ETF doesn't just offset the cost of subsidized hardware given to businesses and consumers, but pays other costs as well. The fee applies to individual customers and small businesses that cancel before the end of their contract.

"The ETF is not limited to the recovery of the wholesale cost of the device over the life of the contract," Verizon told the FCC.

"The ETF partially compensates Verizon Wireless for all the costs and risks of providing service, which include advertising, commission, store costs, and network costs."

If that statement seems odd to you, you're not alone. ETF's are supposed to cover the ongoing cost of running the business? That will be a new concept for most customers, who link in terms of hardware subsidies (if they think about ETFs at all).

Having been part of the outcry over the fee increase, which no other carrier appears to have adopted, I was interested to read the response, which runs to 77 pages.

In it, Verizon says that even with the $350 fee it loses money on early terminations and that the fee must remain high to the very end of the 2-year contract--when a customer would still owe $120--to prevent even greater losses.

Verizon also tries to make the fees seem beneficial to customers who stay for the full term of their contracts.

It is hard for an outsider to fully understand Verizon's business model, though the fact that no competitor, presumably subject to the same economic pressures, has adopted the new ETF scheme works against Verizon's argument.

I feel certain economists, including those working for the FCC, will weigh in on Verizon's claims, which make some sense, at least at the surface. In the spirit of "innocent until proven guilty" I am quoting Verizon's entire response to the EFT question.

The quote starts with the FCC's question, in italics. Verizon's answer then appears, followed by my comments, as marked at the end.

Quote from Verizon's FCC Response

"It appears that if a customer cancels a two-year contract after 23 months, the customer would still owe an ETF of $120. Is this correct? If the ETF is meant to recoup the wholesale cost of the phone over the life of the contract, why does a $120 ETF apply?

"Response: The new ETF structure for Advanced Devices begins at $350 and declines by $10 per month for a two-year contract. Thus, a customer terminating in the last month of a two year contract term could be assessed an ETF of $120. This ETF structure is fair and reasonable for several reasons.

"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. On average, customers who terminated early did so with more than twelve months still left on their contracts. Verizon Wireless estimates that, at the twelve month point in the contract term, its typical loss from the early termination is more than double the applicable remaining ETF amount for an Advanced Device ($230). 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.

"Second, prorating the ETF to zero in the last month would mean that, to recoup the same amount of the losses caused by early terminations as a whole, Verizon Wireless would have to set the starting amount for the ETF higher than $350. Customers as a whole would be worse off if Verizon Wireless were to take this approach because early terminations occur disproportionately in the early part of the contract term and relatively few customers terminate near the end of the contract term.

"Third, customers nearing the end of their contract term have choices if they want to avoid the remaining ETF amount. For example, customers could simply wait for their contract to expire because it would generally be more economic for them to do so. Moreover, customers who terminate walk away with a device that retains value.

"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."

My Take: If the ETF were used solely to offset the cost of subsidized hardware, even with the$120 due in month 23 of a 24 month agreement, I might be able to accept it as somehow reasonable. But, since Verizon rolls other costs into the ETF, this seems like something the FCC might want to act upon.

The killer here is that no other carrier appears to have followed Verizon into this swamp. While the company has answered a first round of FCC questions, many more remain. Verizon needs to strip its "other costs" out of its ETF and be willing to accept mere cost-recovery on the hardware it gives customers.

Charging the $350 ETF, seems like merely a way to make extra money on those who leave early and exert a powerful financial force on all Verizon Wireless customers to remain full-term.

David Coursey has been writing about technology products and companies for more than 25 years. He tweets as @techinciter and may be contacted via his Web site.


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