US telecom regulator Federal Communications Commission (“FCC”) is digging deeper into the mobile “Early Termination Fees (ETFs)”, a widespread practice in the wireless industry. The agency has asked the US wireless carriers to justify the hefty ETFs they charge their contract customers.
 
This brings top-tier incumbent wireless operators Verizon (VZ), AT&T (T), Sprint Nextel (S) and Deutsche Telekom’s (DT) US arm T-mobile USA under the agency’s probe. Moreover, search engine giant Google (GOOG), which is selling Nexus One Android phone, has also been brought under the FCC scanner. Google is charging extra cancellation fees on top of the ETFs levied by T-mobile USA, which offers Nexus One under a two-year service contract. As such, consumers end up paying roughly $550 in aggregate on early cancellations.
 
ETFs are charges/penalties levied by cellular operators on their customers who wish to end their agreements prematurely. Wireless carriers require subscribers to sign up for long-term contracts (typically two-year) given the high subsidies on handsets which they regain over the course of the agreement. As such, carriers use ETFs as a means to recoup the cost of the phones if subscribers choose to end their contracts early.
 
The FCC in its letter has demanded an explanation from the carriers by Feb 23, 2010, clarifying how ETF obligations are disclosed to their customers. The carriers must explain the rationale for calculating such fees and how they are advertised. Moreover, the FCC seeks details regarding the provision for prorating ETFs if a customer discontinues a contract which is nearing expiration.
 
The FCC argues that customers have the right to detailed knowledge about the service plans with an ETF in the absence of any industry standard on such fees. Moreover, the regulator is of the opinion that such fees are substantial and curb customers’ ability to switch carriers. The FCC aims to make the practice of imposing ETFs transparent to customers so that they can make informed choices about a particular carrier and service plan.   
 
However, in support of the carriers, CTIA (the wireless trade association) stated that ETFs allow operators to offer heavy price subsidies to customers to encourage phone purchases. CTIA said that the incumbent carriers also offer options to customers in choosing plans and devices without subsidies and ETFs.
 
The FCC initiated a formal investigation on ETFs in 2009 following Verizon controversial hike in fees for its smartphone customers who choose to leave prematurely. The regulator has questioned the carrier about its outlandish $350 termination fees for advanced devices (such as the BlackBerries and Droids), which were doubled from $175. Verizon’s reply in late 2009 (indicating high subsidies associated with smartphones) did not satisfy the FCC.
 
Legislation was introduced by the US senators in late 2009 to limit the rate of ETFs, preventing wireless carriers from charging more than the actual discount offered for the handsets. While the practice of charging exorbitant fees still continues, the federal intervention is likely to make a deeper impact.
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