Verizon: $350 Early Termination Fee Covers More Than Phones

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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.

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