Calif judge: cell phone "termination fees" illegal [Telecom]

While I'm not a big fan of early cancellation charges, these folks did, in fact, sign a contract.

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Doesn't really matter if the contract had illegal clauses, does it?

The contracts are frequently unconscionable. I'm in the 23rd month of a 24 month contract with Cingular/AT&T which was the only way to get a decent price plan despite the fact that I use the the phone I already had and the account was already set up.

I can live with the New York style cancellation charges where you pay a prorated part of the charge, e.g., half if you cancel half way through, but there are plenty of contracts where they charge you the full amount whether you cancel on the first day or the last.

Regards, John Levine, snipped-for-privacy@iecc.com, Primary Perpetrator of "The Internet for Dummies", Information Superhighwayman wanna-be,

Exactly what clauses were illegal?

I'm assuming the ones that the previous report said were found to be against Californian law.

Well said. I agree with most (not all) of Bill's comments.

The difficulty with the "early termination" penalties -- and in some cases short windows where the customer can terminate or otherwise be locked in for another extended period -- is that it stifles competition between carriers when customers cannot opt for better deals or improved service.

This is not to say that the carrier who provides a "free" phone in consideration of two years of monthly payments should not be paid the cost of the handset if the customer terminates early. (And, conversely, if the customer pays for that handset, it should be able to be used on any compatible competing carrier's network.)

Admittedly, it's hard to make a large capital investment in a wireless network if you have no guarantee that your customer base is going to be there to provide you with a reliable stream of income to amortize that investment. But that risk is no different than the risks taken on by any capital-intensive enterprise such as manufacturing, transportation, power generation, etc.

As for all the nickel-and-dime fees for things like ringtones, music downloads, etc., etc: one needs to realize that the revenue from these fees allows the carriers to keep down the price of the basic service. (And you thought cross-subsidization ended with the Bell System break-up?)

Regards, Will

Or to put it another way: Is a competitive offering for similar cellular service but without early cancellation charges also available

-- perhaps at an appropriately (i.e., slightly) higher price -- from this vendor, or any other?

Even though the current system preys on the inability of Americans to actually READ anything they SIGN, it is possible to get mobile service without entering into a contract requiring early termination fees:

All that is required is for the consumer to PAY the actual cost of the phone. There is no such thing as a "free" phone, and one should wonder why the newest SOTA phones "cost" less than any other complex piece of digital hardware.

The simple reason is that the phone is being sold to you in installments, and I think in that regard, most of the termination fee is warranted. Making this a clear point in the contract IS in everyone's best interest.

For myself, I could have received phones for myself and my spouse for "free" with a 2-year agreement. Instead, I asked for and got a 1-year contract, paid about $29 for each (fully functional but not worth stealing) phone, and am now about three years in with no contract. Similarly, I ignore the "new every two" provisions (which would entail signing another 2-year contract in exchange for another "free" phone).

--Gene

Can you provide a specific example of a carrier that will provide a reasonable monthly rate without a contract if I use my own phone?

The last time I talked to AT&T/Cingular, even though I was using the phone I already had, the only way they'd put me on a bundled minute plan was to sign a two year contract with the same penalties as though they'd given me yet another phone.

Yeah, you can get no-contract prepaid, but unless your usage is very low, the per minute rates are about double the plan rates.

I have a shared 700 minute plan with Sprint, I bought my own phones from a couple of places on eBay that had them for a lot less then Sprint wanted for them even with a contract and rebate. I have no contract and am paying the same as a friend of mine with 3 phones and a 2 year contract. The only thing I have to worry about is with no contract Sprint could raise the plan rate or remove services that I have. It is almost 2 years now and I'm now looking to replace 2 of the phones on my own again.

Verizon will sell you a 1-year contract, at the end of which you become a month-to-month customer. Interestingly, under their "test drive our network" 30-day trial, they state the following:

"Please note that if you purchase a handset at a discount from Verizon Wireless, your Early Termination Fee will be credited only if you return the handset within the 30-day Test Drive period. If you purchase a handset from a Verizon Wireless or one of its Authorized Agents or Retailers, you must call Verizon Wireless at 1.800.922.0204 to request that your Early Termination Fee be waived."

This seems to imply that the termination fee specifically covers the value of the phone, not the service...

--Gene

But will your monthly rate be any lower than it would be if they were amortizing the cost of their providing you with a phone?

For example, I like the European version of the LG "Shine" KE970 which can be bought through legitimate channels for about $300. But I don't think my monthly bill from AT&T Wireless would be a penny less than it would be if I took their discounted version of the "Shine" CU720.

The other side of this issue is, of course, the exclusive deals that the major wireless carriers cut with the handset manufacturers. The most discussed of these, of course, it Apple's iPhone deal with ATT. Even if you buy your way out of your ATT contract so that you "own" your iPhone, you cannot legitimately "unlock" it fromt the ATT network to use on a competitor's GSM network.

As Carl Howe of the Yankee Group noted: "Locked phones are only a piece of the US wireless carrier marketing, but they are the part of the brand experience that consumers can feel and touch. The wired phone world of the Bell System changed completely when the FCC allowed consumers to buy and connect their own handsets. The same will happen with wireless, but only if the carriers embrace, not resist, unlocking their customers from their service."

Carl Howe fails to note that the result of the upheaval in wireline service resulted in a race to the bottom in the pricing of long distance and of local wireline service. It's clear that the wireless carriers have learned from this experience and want to avoid their own bloodbath of competing solely on price.

Regards, Will

That has always been the standard model for business. A la carte customers normally paid more than those customers who purchase a 'bundled' product with discounts.

For instance, typically to get the best interest rate one must commit to a CD at a bank with a time term; lower rates are typically paid to savers who can withdraw any time. Commuters who buy a monthly ticket pay less than those who buy individual tickets, and cashing in a monthly ticket early has penalty charges.

There are of course advantages and disadvanges to each business model (a la carte vs. bundled). As to cell phones, you CAN get a la carte pricing, but you are going to pay more, and that is perfectly reasonable.

For myself, in my cell phone contract the termination fee is enormous; if I wanted out it'd be cheaper just to pay the monthly fee (which is low) to run out the contract. But I knew this going in. By getting the contract I was able to get a low monthly rate, a free phone, and no setup charges.

Paying more *for a given service* a la carte than someone who has a larger bundle is reasonable. Charging the entire bundle rate for less than the entire bundle of goods and services is not. (Wasn't Microsoft's first consent decree the result of their insisting that manufacturers pay them a fee per unit shipped, regardless of whether a Microsoft product was installed on it? It seems that the Justice Department agrees that charging for something whether you deliver it or not is bad, and Microsoft abused its dominant position to demand just that practice. Unfortunately, that's an antitrust rule that probably can't be applied to the competetive mobile phone market.)

Anyway, if their bundle is airtime plus a phone, and I'm paying the same rate with the same conditions for the same airtime *without* the phone, that's definitely not reasonable unless the cost of the phone is negligible... which is not the message they convey via their price list.

Just try offering a transport owner/operator the same rate to deliver cargo in *their* truck as you pay someone to deliver it in *your* truck and you'll see how reasonable that's considered in other industries!

But this has drifted from the topic of the judge's ruling, which wasn't about bundling discounts, contracts, or the very existence of early termination fees (NB: IANAL), it's that carriers have been charging the same fee to people who cancel the day before their contract expires that they charge people who cancel the day after the contract starts (or the day after the legal cooling-off period, if and where that may apply.) The judge appears to have ruled that this practice is unreasonable unless and until Sprint Nextel can justify it quantitatively. This probably would never have been an issue if ETFs had been pro-rated all along because a pro-rated ETF could be justified almost trivially: "There are up-front costs that are amortized throughout the contract period, and our pro-rated ETF attempts to approximate the unpaid portion of those costs."

Once that becomes the industry standard, you and I can haggle over whether paying for a handset that was not included is an example of normal bundling discounts.

FWIW, I've been month-to-month with T-Mobile for years now, having started with VoiceStream just after they had taken over OmniPoint. Began with an unlocked 3-band GSM/WAP phone purchased in Belgium w/o any plan bundled; VoiceStream sold me a SIM and gave me a $20/mo price plan on a 1-year contract.

A year later I added another phone (for my spouse), again a 3-band GSM/WAP device, this one bought used in Poland; this time VoiceStream *gave* me both a SIM *and* a rudimentary Nokia handset on a 1-year contract for a second line on the same price plan. It wasn't long before I changed both plans for a more useful $30/mo "VoiceStream Talk'n'Text" plan that T-Mobile has grandfathered to me as the (now obsolete) "t-Zones Talk'n'Text" plan, no longer available to new customers, but unchanged from the VoiceStream version in its price and conditions, though both lines have been month-to-month for ages.

T-Mobile, like VoiceStream before it, seems to realize that it's a whole lot less costly to *keep* customers, by *not* changing plan terms and conditions they like, than to lose them because of pricing or plan-condition changes, let alone to attract new ones to replace the ones they lost.

Larger companies seem to overlook that basic fact. But what do I know? For all I know, T-Mobile just *might* change my terms overnight. But for now, with more domestic voice-minutes and SMS messages than I can use, and unlimited WAP/GPRS data service world-wide, all at $30/mo per line, I'm happy.

From time to time Cingular/AT&T (my local loop folks) try to coax me into switching to their cellular services. They give up as soon as they hear what my current price plan is. One rep even indicated my deal was so unbeatable she'd be looking into T-Mobile for *her* cellular service -- once her own Cingular contract ended :-) .

Cheers,

-- tlvp