Analyst: Verizon’s Defense for Whopping Fees ‘Disingenuous’

Verizon recently doubled its early termination fees (ETFs) to US$350 for customers who want out of their wireless phone contracts — a fee much higher than competing carriers charge. However, there’s no need to worry; the extra money coming into Verizon not only helps the nation meet its mobile broadband goals, it also helps lower-income consumers to consider buying a smartphone.

So says Verizon in a letter filed late last week to the Federal Communications Commission, which had asked for explanations regarding the company’s new ETF rates announced in November. The FCC also wanted to know about data charges such as a $1.99 fee for minimal, accidental usage of mobile Web services.

“By reducing up-front costs to consumers, this pricing lowers the barriers to consumers to obtaining mobile broadband devices,” according to Kathleen Grillo, Verizon senior vice president of regulatory affairs. “It thus enables many more consumers, including those of more limited means, access to a range of exciting, state-of-the-art broadband services and capabilities. The company’s pricing structure therefore promotes the national goal of fostering the greater adoption and use of mobile broadband services.”

The new termination rates are offered on a two-tiered basis, Grillo told the FCC, and customers are given plenty of notice about what charges they may incur if they want out early from their contracts. “The higher ETF associated with advanced devices reflects 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,” she said.

The Ultimate Cost to Verizon

When you consider the cost of data plans, insurance and other services that go along with the purchase of a smartphone these days, “it’s a bit disingenuous to characterize someone who can afford $90 to $100 a month as struggling economically,” Forrester Research analyst Charles Golvin told the E-Commerce Times. “That’s not realistic. Someone in that economic status is much more likely to buy a prepaid phone or choose something like a Boost or Metro PCS plan at a $50 flat rate. They may desire a high-end smartphone, but at this stage of our society, mobile phones and mobile services are no longer a luxury. They’re a requirement for people to have in their lives as well as for their work.”

Verizon received slightly more benefit of the doubt from ABI Research analyst Michael Morgan. After all, the company must spend a great deal of money to stay competitive in a red-hot telecommunications sector, which now includes selling netbooks. “It is true that subsidies are a huge cost to the carriers. Maybe it’s not the phones that are getting more expensive but their mix of devices, with more of a focus on smartphones. In that sense, OK, I’ll give Verizon a little leeway there. But doubling [the termination fee]? I don’t think so.”

Besides, it’s not necessarily the cost of the phone that keeps lower-income consumers from considering a smartphone; often, it’s the cost of the plan that goes with it, Morgan told the E-Commerce Times. “It takes about 10 to 12 months for [Verizon] to recoup the cost of the phone through data plans and such.” The remainder of a typical two-year contract is gravy, “and that gravy is what makes Wall Street happy,” he said.

A Bargaining Chip?

Early termination fees have been a favorite target for wireless carrier critics long before Verizon’s November move. However, the Obama administration may be focusing extra scrutiny on a variety of wireless business practices, Golvin said. So Verizon may be ready to make some adjustments if it feels action is pending against it.

AT&T and Verizon have some of the most skilled and longstanding lobbying on Capitol Hill, and they have a very strong pipeline to the seats of power, Golvin said. “They have a good sense of what is just rhetoric for public consumption versus what is pending action. They’ll respond according to that sense.”

Carriers follow one another’s business practices very closely, and Verizon’s higher ETF may be a trial balloon for the entire industry, Morgan added. It could also be a bargaining point for other points of contention between the industry and regulators, such as the “accidental” charges for mobile Web services. Verizon strives to make sure that customers aren’t charged for accidental usage, Grillo said, and they can contact customer service if they feel that’s happened to them.

Then there’s the possibility that Verizon is trying to modify customer behavior. “You don’t have to do an ETF if you pay for the phone upfront. I wonder if this could also be a way to wean consumers off the addiction of handset subsidies. I can own the phone outright, or risk $350 if something goes wrong. Carriers would truly enjoy not having to have that subsidy to grow the market,” Morgan said.

If Verizon sees no detrimental regulatory or customer pressure because of the higher termination fees, the other carriers may follow suit, “or use it in an antimarketing campaign,” Morgan said.