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On Call: Early termination fees aren't the problem, but customer clarity is

I understand why carriers charge ETFs, but customers still deserve more transparency around them.

You may be surprised to learn that Tuesday, Feb. 23 was a big day in the U.S. wireless industry. It marked the deadline for cell phone carriers to respond to an investigation by the Federal Communications Commission into early termination fees (ETF). Though ETFs are nothing new, it was only in the last couple of years that the Feds put them under the microscope. And naturally, the carriers and their man in Washington, the Cellular Telecommunications Industry Association, are doing their best to justify the charges.

The four major carriers plus Google each responded to the FCC's set questions with a letter (Engadget posted them all in full). The letters make for interesting reading, not least because you marvel just how verbose lawyers can be ("less is more" was not a theme here). And though each carrier's argument differs slightly, an overarching theme--particularly from Verizon Wireless--is that customers are well aware of ETFs so it shouldn't come as a surprise that they must pay a penalty when ending a contract early. Granted, ETFs shouldn't come as a shock to anyone, but just because someone tells me they're going to smack me in the head does not give them the right to do so.

Yet, this is not going to be a blanket rant against ETFs (I did that already), because I see both sides of the problem. I understand that customers would enjoy more freedom to switch service providers, but I also get that in return for offering discounted phones carriers are going to want something back. Seriously, do you really think that a Samsung texting phone costs nothing to make? It's free only because the carrier is covering the manufacturer cost for you. So it expects you to remain a customer for a certain period.

On the base level, it's a sensible argument and most of the carriers use it in their FCC responses. Yet, that isn't always how ETFs work and carriers don't always do a good job of offering another explanation. In its FCC letter, T-Mobile insisted that ETFs are not tied to handset subsidies, but are instead related to the revenue that the carrier loses from a canceled user agreement. If that's true, and T-Mobile's ETF doesn't balance out the cost of a subsidized handset, then I wonder how the carrier is recouping that money if a customer skips out early. See...it can get a little confusing.

The problem with ETFs is not that they exist; it's that there remains so much mystery around them. If T-Mobile's ETF isn't about phones, then exactly how did it decide to charge $200? How does it quantify the lost revenue from a canceled contract? And consider Verizon. It really started the whole FCC investigation with its $350 termination fee for "advanced devices," and isn't showing signs of budging. It used its letter to remind Washington that it reduced the number of advanced devices, but the carrier doesn't tell us much else. I'm not saying Verizon's two-tiered system is wrong--perhaps adjusting the ETF to the real cost of the handset isn't such a bad idea--but customers need more information.

Google, which seemed a little peeved it had to reply to the FCC in the first place, partially defended its "equipment recovery fee" for the Nexus One by stating that it recently lowered it to $150. The company gave us some clarity on the fee's purpose. If a customer ends their contract early, the company wrote, Google has to reimburse T-Mobile for the commission it received for securing that contract. That may not be the best answer, but it's a start.

This is exactly where carriers can improve. They've taken small steps to prorate fees and offer non-contract options (like T-Mobile's Even More Plus plans), but they need to better inform customers about how those fees are applied, how the amount is determined, and what the money covers. I think that most customers would be more willing to pay the fee if they knew it wasn't just invented out of thin air in an executive boardroom.

True, you do have the option of buying a phone at full price and not worrying about a contract, but the ETF model has trained customers to except to pay no more than $199 for a handset no matter how advanced it is. Until that customer expectation changes, ETFs are here to stay. But in the meantime, carriers can throw us a couple of other bones. For one, customers could be given a bit more wiggle room in leaving their contract. Though a carrier can end a contract if it discontinues service in an area, customers don't have the same right if they move to a place with poor coverage. They should. What's more, though most carriers allow customers to leave because of a "material change in service" they don't define what that is. I, for one, would like to know what a material change is.