Carriers Relaxing Early Termination Fees to Compete
Carriers will emphasize “customer-friendly” policies to compete next year, analysts told Communications Daily. Recent news that AT&T, T-Mobile and Sprint Nextel will introduce progressive early termination fees in 2008 arrived a year after Verizon Wireless decided to prorate its own ETFs. The Verizon rivals hesitated due to higher churn, but have been “forced into” prorating “given Verizon’s leadership,” said Current Analysis’s William Ho. In 2008, relaxed fees will be a “sign of [carrier] strength and confidence,” said ThinkEquity’s Anton Wahlman. “The guy who wins will be the one… not scared of letting you go.”
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AT&T, Sprint and T-Mobile haven’t detailed what makes their new policies customer friendly, but they will likely be similar to Verizon’s offer, analysts said. Verizon’s policy starts customers with a $175 ETF and reduces the fee $5 every month they stay on contract. AT&T’s existing policy charges a $175 flat fee; Sprint and T-Mobile assess $200 for early cancellations. While the three are expected to follow Verizon’s example and prorate their own fees, “the unknown and yet to be named new ETF policies” could mean carriers will differentiate on more minor aspects, Ho said. For example, a carrier could make their policy seem more consumer-friendly by reducing ETFs for additional lines on family plans, he said.
Verizon’s industry-leading churn let the company prorate ETF ahead of the competition last November. In the third quarter, Verizon’s churn was 1.27 percent. Meanwhile, AT&T reported 1.7 percent churn, T-Mobile posted 2 percent and Sprint had 2.3 percent. The trio revealed ETF changes in the same order. AT&T stepped first in October; T-Mobile and Sprint announced plans last week, with Sprint’s news arriving mere hours after T-Mobile’s.
Relaxed early termination fees will spur consumer “musical chairs” among cellphone carriers, but the game will be short, analysts said. Carriers have long used ETFs to curb contract cutting, but progressively rating fees is unlikely to change overall churn in the long term, said Jefferies’ Jonathan Schildkraut. The turnover impact will instead echo that of FCC number portability rules, he said. Customers who already wanted to leave will leave right away, but churn should normalize after the “one-time movement,” he said. “People move when they want to move and in general wait until the end of the contract.”
Also, while prorated ETFs may be easier for consumers to stomach than flat rates, they will still be priced to retain customers, Ho said. “If you do the math” for a Verizon customer 6 months into their contract, the ETF is $145, he said. “It’s not as bad as $175, but it’s still painful.”
If the new policies do increase churn, carriers can still look forward to higher gross adds, said Wahlman, comparing the situation to a Swedish law restricting businesses from firing employees. In Sweden, the rule means businesses don’t do much hiring, he said. Similarly, if relaxed carrier ETF policies increase the number of contract terminations, carriers will also have more consumers to sign up, he said.
The relaxing of ETF policies could foreshadow “a world without contracts,” but an obligation-free cellphone market would come with a price, Schildkraut said. Carriers use contracts and termination fees so they can subsidize handset costs and offer free a $200 phone. If carriers got rid of contracts altogether they would need to charge full price for phones or risk significant monetary loss when a customer leaves, he said.
Growing customer willingness to buy unsubsidized handsets doesn’t mean carriers will soon relinquish contract obligations, said Current Analysis’ Wes Henderek. The iPhone’s success proved there’s a niche market for high- priced, unsubsidized handsets, but carriers would rather capitalize on the group, not give them freedom to move on, he said. The niche, which put down $599 for iPhones at launch, is less price-sensitive than other customers and will be the group driving carriers’ average revenue per user, he said. That’s why AT&T made sure to sign iPhone users to 2-year contracts, he added.
Fear of “price wars” will also keep ETFs in place, Henderek said. Though it might seem like a clever marketing ploy, a carrier would not run a promotion offering to pay a rival network customer’s ETF, he said. Paying an extra $100 or more to acquire a customer would diminish the subscriber’s value. Worse, rivals would be forced to match the offer, sending all the carriers “back to square one,” but with higher customer acquisition costs, he said.
Though cellphone contracts still have life, contract- free, prepaid plans are on the rise, Henderek said. ETFs are not needed for the pre-paid model since it lacks handset subsidies, he said. Prepaid currently has less appeal than post-paid because most new devices appear on post-paid plans first, he said. However, prepaid has seen a growth “explosion” lately, and the number of pre-paid handsets will soon match that of post-paid plans, he said.