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Mobile carriers, Google defend cancellation fees

The wireless industry and Google explained in letters to the FCC this week how their early termination fees are implemented and how they are explained to consumers.

U.S. mobile operators, , in letters sent to the Federal Communications Commission earlier this week, defended their use of early termination fees and explained how they are informing consumers about their policies.

In January, the FCC asked each of the four major wireless carriers, AT&T, Verizon Wireless, Sprint Nextel, and T-Mobile USA, along with Google to detail how they inform customers of their fees in statements on corporate Web sites, in brochures and sales scripts, and in monthly bills. The companies had until February 23 to respond. Earlier this week, they filed their answers to the FCC's questions.

In general, the responses were not surprising. AT&T defended its use of early termination fees (ETFs) by stating that without them, consumers would have to pay more up front for phones. It used the popular Apple iPhone as an example.

AT&T subsidizes the cost of a 16GB iPhone 3GS by about $400 if customers sign a two-year contract. The ETF is $175. If customers don't want to be subject to an ETF and they don't want a contract, they have the option of buying the phone at the full retail price of $599.

"Customers clearly understand that they have choices," Robert Quinn, AT&T's senior vice president for federal regulatory affairs said in the letter. "While the vast majority of AT&T's subscribers choose term commitments and discounted or free handsets, AT&T has millions of month to month and prepaid subscribers. Still, overwhelming consumer demand for such bundled discounts drives carriers to make even highly sophisticated and costly devices like smartphones and Netbooks available at steep discounts, even from the moment they are introduced."

Critics, such as consumer advocates, say early termination fees are excessive. They believe carriers use these fees to stifle competition and generate revenue. Several class action lawsuits have been filed over the issue. And Congress and the FCC have looked into the issue. Operators have responded to the pressure. And today every major wireless carrier in the U.S. prorates its ETF so that the fees decrease over the life of the contract. Operators are also now offering cell phone subscribers the option to buy phones without a subsidy and no ETF.

Wireless operators have already settled several of the class action lawsuits. And companies seem to be bending to pressure from the government.

Verizon Wireless has come under fire recently for doubling its early termination fees on certain devices. In November, Verizon Wireless announced it was increasing its $175 early termination fee to a whopping $350 for "advanced devices," such as smartphones. The FCC sent a letter to Verizon in December asking the company to explain why the new fee is necessary and how it will be implemented.

The company has since reduced the number of devices that require the hefty new ETF. Kathleen Grillo, Verizon's senior vice president of federal regulatory affairs, also said in the letter to the FCC this week that Verizon is changing the price displays in its stores to include the ETF amount, in an effort to make its policies more clear to consumers.

"Verizon Wireless strives to ensure that customers are aware of their options, understand the differences among those options, and have access to assistance when questions arise about their device and service plan," she said in the letter.

Google has also been criticized for an early cancellation fee it charges customers who buy the new Nexus One phone from its Web store. In addition to any carrier early termination fee from T-Mobile, currently the only carrier partnered with Google to offer the phone, customers who buy a Google Nexus One device and return the phone within 120 days were subject to a $350 fee from Google. This was on top of the $200 fee that T-Mobile charges customers who cancel their service contracts before the end of their two-year contract.

The double fee outraged many consumers, which led to the FCC's questioning of Google over these fees.

Google has since reduced the cost of its fee to $150. In its letter to the FCC, Richard Whitt, Google's head of telecom and media policy, referred all inquiries about the $200 carrier ETF associated with the Nexus One to T-Mobile.

As for its own fee, Whitt explained that this was not an ETF but instead it is an Equipment Recovery Fee or ERF. Google explained that as part of its contract with T-Mobile, T-Mobile pays Google a commission for each new T-Mobile subscriber and each existing T-Mobile subscriber who upgrades her or his service plan through the Web store.

Because of this commission, Google is able to charge customers $179 for a Nexus One instead of the $579 fee for an unlocked, unsubsidized device.

But when a subscriber returns his phone and cancels his T-Mobile service within 120 days, Google must repay T-Mobile the commission, Whitt said. The ERF is designed to recover this commission that Google must pay T-Mobile.

"Google's business philosophy is to pass along the entire amount of any commission to the consumer, in the form of a discount on the device retail price," Whitt said in the letter. "However, where a subscriber cancels her or his service agreement with T-Mobile within a 120 day period, T-Mobile seeks full repayment of the commission from Google."

Customers can also purchase the Nexus One without a mobile service contract for $529, and Google is working to expand the number of carriers that support the device, Whitt added.

While the wireless operators' motives for charging fees seem justified when consumers receive a subsidized device, the real question is whether consumers actually understand they are getting a discount in exchange for signing a contract. Wireless operators say they are transparent about their policies.

Whether or not the FCC agrees is not yet known. But simply the act of asking questions and exerting some pressure has seemed to work well for getting wireless operators to revise their fee policies and better inform consumers.