As consumers, early termination fees are a symbol of what's wrong with the overall wireless industry. Not only does it appear they are raising prices every contract, it seems as if carriers are employing anti-competitive tactics to keep you to stay. In a classic "tyranny of the contract," situation, you are given this large contract to sign with onerous, one-sided clauses. Of course, you could choose another carrier but most clauses are standardized across carriers leaving you with no real choice.
Wireless carriers argue -- correctly so -- that it isn't as if the carrier isn't offering value at the time of the contract. Most carriers offer substantive discounts on handsets at the time of signing. And while some economists argue this third party payment system is a boon in the form of excess profit for popular handset makers like Apple and Samsung, consumers still initially receive expensive handsets at a fraction of the real cost.
However, if you have ever attempted to leave your carrier before the contract ends you will soon find out the golden rule of economics -- there's no such thing as a free lunch -- by receiving a termination fee that can be as high as $350. And just what carrier charges that large fee? Actually, it's a tie between the largest wireless carrier Verizon (NYSE:VZ) and third-largest carrier Sprint (NYSE:S). AT&T (NYSE:T) isn't far behind, however.
Verizon's change of policy is even less consumer friendly; Sprint is worse
Last week, Verizon changed their Early Termination Fee policy for new subsidized handset subscribers. Unfortunately for consumer advocates the changes are even less friendly for early terminators. Although the maximum amount of the early termination fee did not change, the ETF reduction of $10 per month only starts in the eighth month instead of immediately. The contract does increase the ETF more in months 19-23, dropping by $20 instead of $10 previously. The end result is a hike of the ETF, especially to early subscribers that are more likely to switch companies.
With this change, Verizon leaps above Sprint to definitively have the worst Early Termination Fee policy. Sprint's Early Termination fee doesn't drop instantly, remaining at $350 until the seventh month in which it drops to $340. The fee then drops by $20 a month until the 19th month, where it remains at $100 until the end of the contract. In what's quickly becoming a rarity in the business, AT&T's smartphone ETF is rather straightforward; the fee starts at $325 and is reduced by $10 per month starting the first month.
T-Mobile has no Early Termination Fees, but there's a reason for that
Out of the major four carriers, only T-Mobile (NASDAQ:TMUS) is without an early termination fee. There's a reason for that, the company doesn't provide device subsidies. Matter of fact, separating the cost of the device from the cost of the wireless plan has allowed T-Mobile to attack the status quo with its "Un-carrier" initiatives.
The first iteration of Un-carrier, Un-Carrier 1.0, actually decided to kill contracts entirely, allowing customers to leave whenever they want with a fee. Without subsidized phone prices to recoup, the company can forego the standard 2-year contract. A later Un-carrier initiative actually pays other company's ETFs as an inducement to switch to T-Mobile; Sprint also reimburses customers for ETFs.
Apparently, that isn't all Sprint is copying from T-Mobile. New CEO Marcelo Claure announced he is considering eliminating device subsidies next year after reporting a disappointing second-quarter loss of $765 million earlier this month. And it's not only Sprint that's listening; AT&T's CEO Randall Stephenson once called the current phone subsidy model "unsustainable" and Verizon's CEO Lowell McAdam called T-Mobile's idea to scrap the device subsidy as "a good idea."
In the short-term, however, AT&T and Verizon will probably not move unilaterally to eliminate device subsidies. Rather, it appears they are looking to nudge subscribers into their non-subsidy plans: AT&T Next and Verizon Edge. Eventually, it is entirely possible for device subsidies to go away and the ETF will be a thing of the past. It will be interesting to see what new fee will be created to replace the lost revenue.
Jamal Carnette owns shares of Verizon Communications. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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