Verizon Wireless Defends $350 ETF for Smartphones

Verizon said the fees allow it to discount the prices that customers pay upfront for equipment. The carrier imposes an early-termination fee of $175 for basic devices and $350 for smartphones. The smartphone charge is higher because of “the higher costs associated with offering those devices to consumers at attractive prices, the costs and risks of investing in the broadband network to support these devices, and other costs and risks.” Verizon said it pays manufacturers an average of twice as much for smartphones as for other handsets. The costs of advertising and store and sales staff are also higher for smartphones because the devices are more complex, it said. And Verizon said it’s making “significant ongoing investments” in broadband networks to support the higher bandwidth needs of smartphones.

Verizon defended its practice of reducing the fee $10 per month during a contract term, leaving a customer cutting service in the 23rd month of a two-year contract owing $120. The carrier said it “still incurs a financial loss from early terminations, even with the $350 ETF.” Most customers ending service early do so after a year, it said. At that point, Verizon’s “typical loss from the early termination is more than double the applicable remaining ETF amount for an Advanced Device ($230),” the carrier said. “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.” And the fee would have to start “higher than $350,” it said.

Verizon said it tells customers about the fees through ads, sales representatives, customer agreements, customer guides, sales receipts, online disclaimers and sales confirmation letters. Customers don’t pay the fee if they cancel in the first 30 days or they pay full price for the device upfront, it said. Customers who want to leave late in their contracts “have choices if they want to avoid the remaining ETF amount,” Verizon said: They can wait for their contract to expire, or “walk away with a device that retains value.” Verizon “has no present plans to increase the ETF in the near future for other services and devices,” it said.

The FCC has approved of early termination fees, said Verizon, pointing to the commission’s 2003 orders on number porting and Ryder Communications. “The Commission has allowed carriers to use early service termination provisions to allocate the risk of investments associated with long term service arrangements with their customers,” it said. The FCC also acknowledged the role of the fees in its most recent wireless competition report to Congress, the carrier said.

Verizon’s letter shows why the FCC should reject CTIA’s petition to end the commission’s proceeding on the fees, said General Counsel Brad Ramsay of the National Association of Regulatory Utility Commissioners. “NARUC continues to believe, as part of its inquiry there, the FCC should reexamine the economic and policy assumptions underlying its 1992 decision and determine if use of ETFs remains a needed and “efficient promotional device” that benefits both consumers and wireless carriers,” he said. “This response suggests the FCC should investigate the equipment and customer acquisition costs Verizon (and others) cite as justification for ETFs to determine if such costs are being reasonably and appropriately recovered. At a minimum, the agency could confirm if competing carriers provide similar advanced devices at competitive rates without the same expensive ETFs.”

The fees should subsidize only the price of the handset, said Consumers Union analyst Joel Kelsey. A customer leaving a carrier over shoddy service or excessive fees shouldn’t be covering the company’s costs for advertising to new customers or building its network, he said. Kelsey disputed Verizon’s argument that a device retains value after the customer leaves the carrier, saying smartphone devices are generally exclusive to the network operator that sells it. Consumers Union supports Klobuchar’s bill and wants the FCC to deal with the fees in a rulemaking, he said.

“Verizon is blowing smoke at the FCC’s attempts to protect consumers from their unfair billing practices,” said Free Press policy counsel Chris Riley. “Verizon claims that it must keep up these harmful practices to maintain its operating costs, but it is hard to imagine that this highway robbery is necessary when you look at the company’s sky-high profit margins.”

State consumer advocates are “unimpressed” with Verizon’s response, said Deputy Consumer Advocate Patrick Pearlman of the National Association of State Utility Consumer Advocates. Verizon says consumers don’t have to sign contracts, but advertising by the carrier in exhibit C of the filing includes a disclaimer that all phones and devices require a new two-year activation, he said. NASUCA is also concerned that Verizon doesn’t clearly distinguish for consumers which phones are advanced and which basic, he said.