Early Termination Fees Equal Lower Consumer Rates
April 2006
By relying on market forces, rather than regulatory proscription, the Federal Communications Commission has cultivated a highly competitive commercial mobile landscape. Four nationwide mobile carriers as well as large regional and numerous smaller operators provide facilities-based wireless service. Additionally, dozens of Mobile Virtual Network Operators (MNVOs) resell the service of other companies. In all, wireless companies serve over 200 million Americans, offering consumers a wide variety of options – including prepaid plans, contract plans (of varying lengths), as well as month-to-month service plans. Some of these plans include Early Termination Fees (ETFs) as components, and some do not.
Even though most customers will never pay an ETF, ETFs are part of wireless carriers’ rate structures. ETFs are a means of holding customers to the “bargain” they made with their carrier and allow carriers to offer some of their most attractive rate plans to the customers who commit to a specific term. They are a common practice in many industries: airlines charge cancellation fees; car dealers assess fees for breaking leases; and many rental properties require non-refundable deposits. ETFs provide a measure of predictability to the revenue stream reasonably expected by wireless carriers in exchange for costs incurred to provide the services, such as the carriers’ more than $174 billion in total cumulative capital investment. They enable carriers to offer attractive initial discounts and monthly pricing to customers willing to make a minimum service commitment, while providing some measure of compensation for lost revenue and otherwise unrecoverable up-front costs caused by early termination.
While all national carriers offer month-to-month or prepaid wireless plans without ETFs, consumers overwhelmingly prefer the ETF-supported rate structure of the long-term plans, with their lower initial and monthly payments. Without the availability of the ETF to mitigate losses from early service terminations, such plans would cease to exist in their present form. More >
According to Dr. Jerry Hausman, the MacDonald Professor of Economics at MIT, “The ETF reduces carriers’ costs of serving all customers by reducing transaction costs, and the wireless industry is intensely competitive. Thus, prohibiting carriers from charging ETFs will cause prices for wireless services and/or equipment to be higher than they otherwise would have been.” 1
Despite the important consumer benefits inherent in rate structures that include an ETF, a number of class action lawsuits have been brought in an attempt to use state law to invalidate this central component of popular wireless rate plans. CTIA petitioned the FCC in March 2005 to declare that ETFs are “rates charged” for wireless services and any application of state law by a court to invalidate, modify, or condition the use or enforcement of ETFs constitutes prohibited rate regulation. The Association also argued that the Commission should make clear that state ETF regulation conflicts with national wireless policy as delineated in the Commission’s decisions to detariff wireless services and to rely upon competitive market forces to establish rate levels and rate structures.
Regulatory rules that limit wireless carriers’ range of service options, including plans with ETFs that allow customers to establish long-term relationships, may result in fewer discounts, less valuable service offerings, and thereby harm both consumers and service providers. ETFs have produced lower overall wireless rates, substantially reduced economic barriers to entry for wireless subscribers, especially younger and lower income users, and stimulated both wireless-to-wireless and wireless-to-wireline competition – to the benefit of all consumers.
1 Declaration of Professor Jerry Hausman, February 11, 2004, In the
Superior Court of the State of California in and for the County of Alameda,
In Re: Cell phone Termination Fee Cases, at 10.
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