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AT&T and Verizon defend early termination fees

Executives defend the high fees that their companies charge for terminating wireless services early.

LAS VEGAS--Executives from AT&T and Verizon Communications defended early termination fees for wireless customers Tuesday, but said they wouldn't oppose Federal Communications Commission rules that required these fees to be "reasonable."

Jim Cicconi, AT&T senior executive and vice president for legislative affairs for AT&T, and Tom Tauke, executive vice president of public affairs and policy for Verizon, said following a panel discussion at the NxtComm tradeshow here, that their companies are justified in charging early termination fees for wireless contracts, which often top out at $200.

The battle over early termination fees is heating up as wireless operators face multimillion-dollar class action suits from consumers who say these fees are unfair and deter competition. So far, wireless operators seem to have the upper hand in the battle, as a California state jury ruled in favor of Sprint Nextel last week in the first of these class action lawsuits.

But now, the FCC is considering taking jurisdiction over early termination fees. And the agency is considering a proposal from Chairman Kevin Martin that would require consumers be given a 30-day grace period to cancel their contracts without penalty. After those 30 days, early termination charges would then be prorated or reduced over the duration of the contract. Martin also proposes that fees should be based on the cost of the phone and that they should be "reasonable."

Cicconi and Tauke said that they are confident they could reasonably justify the cost of their fees, despite criticism from consumer advocates who say these fees are not used to recover costs but are merely used to deter customers from switching services. One industry expert who testified at a recent FCC hearing said that the early termination fees wireless operators charge are roughly 12 times higher than the cost of the actual phone subsidy they claim to be recovering.

"The fact is that it costs us hundreds of dollars more than the fees we charge to acquire a customer," Tauke said.

The executives also argued that consumers have many choices when it comes to the phones they buy and the services they subscribe to. Both carriers offer some phones at full price and allow customers to subscribe to month-to-month contracts, they said.

While AT&T and Verizon Wireless might offer some phones at full retail price in exchange for month-to-month service contracts, most of the hottest and most popular phones are not offered in this way. For example, the new 3G version of Apple's iPhone offered exclusively on AT&T's network can only be bought for the subsidized price of $199. AT&T also requires new iPhone users to sign up for a two-year contract. The previous version of the iPhone, which was not subsidized by AT&T, also required customers to sign up for a two-year contract with AT&T.

When asked why AT&T isn't giving consumers the choice of buying the new iPhone for the unsubsidized retail price without the constraints of a contract, AT&T's Cicconi had this to say: "Apple is providing the iPhone on these terms and conditions that it negotiated with AT&T. And if customers don't want to accept these terms, they can buy other devices."

While that's true, consumers still have no other way to buy this particularly innovative phone without agreeing to strict contractual terms from AT&T. This is despite the fact that AT&T said it has found its iPhone users to be among its most loyal customers.

"People have a choice," Cicconi continued. "They make decisions based on a lot of factors, like features and functionality of the phone and the terms and conditions under which that device is offered. Why should the government intercede on a deal that was struck between AT&T and Apple? I don't think the FCC should single out any one device in making policy."

Verizon's Tauke chimed in by saying that other industries also require term contracts.

"My gym requires me to have a year contract," he said. "The lawn service that cuts my grass has a one-year contract. Tivo requires a year service. This isn't unusual, and it's questionable that any government should regulate fees on any service."

This might be true, but there are many goods and services, particularly utility services, which don't require contracts. I've never had to sign a contract to get water or electricity. And I never signed a contract for my landline telephone service. I'm interested to hear what readers think about this issue. So please share your thoughts in the "Talk Back" section below.