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Verizon Wireless Defends Early Termination Fees

Verizon handsets
Verizon Wireless is defending its decision to double the fees for consumers who cancel their service contracts early, telling federal regulators that the rate hike actually amounts to a net consumer benefit.

Earlier this month, the Federal Communications Commission asked the leading wireless carrier to explain the increase, which, implemented in November, doubled the maximum early termination fees (ETF) for high-end handsets from $175 to $350.

"This pricing structure enables Verizon Wireless to offer wireless devices at a substantial discount from their full retail price," Kathleen Grillo, Verizon's senior vice president of federal regulatory affairs, responded Friday in a letter to FCC officials. "By reducing up-front costs to consumers, this pricing lowers the barriers to consumers to obtaining mobile broadband devices."

Verizon, like the other big wireless carriers, heavily subsidizes the production and marketing costs of smartphones, often in exchange for an exclusive contract with the handset maker. That arrangement brings the devices to market at reduced costs for consumers who agree to a service contract, typically of two years.

The FCC has been looking into several practices of the wireless industry to determine whether they are harmful to consumers, including ETFs and exclusive handset deals.

In her letter, Grillo pointed out that Verizon offers consumers the option of paying full price for devices in exchange for a month-to-month contract that wouldn't be subject to any termination fees.

"The overwhelming majority of Verizon Wireless customers, however, choose to commit to a term contract because they see great value in acquiring state-of-the-art wireless devices at heavily discounted prices," Grillo said.

She also noted that Verizon prorates its fees, so consumers who cancel service early pay a lower penalty the closer they are to the end of their contract. Consumers who signed up for contracts after Nov. 14 would be subject to a baseline ETF of $350, minus $10 for each completed month of service. Previously, Verizon had set a starting point of $175, and then subtracted $5 for each completed month.

Grillo said that Verizon's subsidy for so-called "advanced devices," which refers to the class of handsets subject to the ETF hike, is on average more than twice as high as what it pays for regular devices that are still covered by the $175 ETF model.

In its letter of inquiry earlier this month, the FCC had asked for an explanation of "the cost differentials that Verizon pays for advanced devices over what it charges its customers." Grillo did not provide specific figures, however, saying only that the differential "varies among the numerous devices that Verizon Wireless sells."

"Term contracts with ETFs are mutually beneficial," she concluded. "They benefit consumers by enabling them to obtain access to advanced services at a significantly lower up-front cost, and they benefit Verizon Wireless by providing a steady, predictable stream of revenue that allows Verizon Wireless to recoup the extraordinarily expensive investments required to support its wireless network and operations and the cost of providing the devices at a substantial discount."

Some advocacy groups found Verizon's defense unconvincing. Free Press, a media-reform group that has been supportive of the FCC's wireless inquiries, called Verizon's ETF policy "highway robbery" on Friday.

"Verizon is blowing smoke at the FCC’s attempts to protect consumers from their unfair billing practices," Free Press Policy Counsel Chris Riley said in a statement.

Verizon enjoys the support of the principal trade association representing the wireless industry, CTIA, which is heading into 2010 with early termination fees high on its policy agenda. The group plans to oppose vigorously any effort to curb the practice, including a bill pending in the Senate that would set parameters for how much carriers could charge customers who cancel service early.

"I think the issue is a knee-jerk reaction on the Hill to what seems a populist issue," Jot Carpenter, CTIA's vice president of government affairs, said in a meeting with reporters last week. "But if that really were enacted I think the logical result is the cost of handsets goes and I don't think that's a good outcome for consumers."