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Congress Slams AT&T Over iPhone Contract, Fees

Subscribers Hit With High Purchase Price Plus Steep Termination Fee

By Martin H. Bosworth
ConsumerAffairs.com

July 13, 2007

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Members of the House Telecommunications Subcommittee criticized AT&T for locking iPhone buyers into an exclusive contract and for imposing steep termination fees to break the contract.

Committee chair Ed Markey (D-MA) complained that provider exclusivity and high fees are "stultifying innovation and unquestionably [diminishing] consumer choice."

In his opening statement at what was dubbed the "iPhone hearing," Markey held up a new iPhone and praised its technological innovation while criticizing AT&T for charging a $175 termination fee on top of the $500-$600 the buyer paid for the device.

"This highlights problems with the current marketplace structure, where devices are provided by carriers, portability of devices to other carriers is limited or non-existent, and many consumers feel trapped having bought an expensive device or having been locked into a long-term contract with significant penalties for switching," Markey said.

Termination fees and exclusive "locked-in" contracts are an unfortunately common feature of the wireless market, but AT&T's fees are relatively unique in that the telecom giant did not pay to create the iPhone -- Apple did.

Thus, AT&T profits from selling the phone at full retail price and charging a termination fee while paying no costs for production. And canceling your contract turns the iPhone into what Columbia University professor Tim Wu called an "expensive paperweight."

Market Dominance

Wu, a supporter of net neutrality and open wireless standards, testified that the current wireless market in America is a "spectrum-based oligopoly," where a few large companies have so thoroughly dominated the market that they can set punitive conditions on consumer purchases without little fear of reprisal or challenge from new competitors.

"[W]hen the criteria for market entry is 'fit' with the plans of the major carriers, innovation is inevitably distorted," Wu said. "And since innovation and economic growth are so closely linked, this affects us all."

Steven Zipperstein, general counsel for Verizon Wireless, challenged Wu's market assessment.

"Carriers are constantly expanding services and benefits to customers because they know they must fight fiercely to attract and retain those customers," he said.

Open access for wireless markets would reduce companies' incentive to innovate, Zipperstein argued. "In this model, wireless network operators would have a decreased incentive to develop new products or services, because they would simply be in the business of providing airtime access for products chosen by the consumer, deterring investment away from network upgrades," he said.

As evidence, Zipperstein pointed to the development of Verizon's own EV-DO wireless broadband network, for which he claimed Verizon spent upwards of $5 billion annually to maintain.

But as ConsumerAffairs.com reporter Joseph Enoch documented last year, Verizon terminates the accounts of subscribers who utilize the network for any activity more substantial than checking e-mail or surfing the Web, despite advertising the network as "unlimited."

Open Standards

The hearing also discussed the FCC's upcoming auction of portions of the available wireless spectrum, formerly used for analog television broadcasts. Net neutrality supporters and consumer advocates have pushed for opening the spectrum for creating a nationwide wireless broadband network, which Consumers' Union's Chris Murray called a "positive development."

Murray, the nonprofit organization's senior counsel, testified that "[w]ithout open access to the full range of wireless services and devices, consumers will continue to face unfair charges for service modification or termination, inability to use innovative applications, devices that have been hobbled to minimize competition, and other troublesome practices currently used by the dominant cell phone and broadband providers."

The open access standard has won a surprising ally in the government -- FCC chair Kevin Martin. Normally a staunch supporter of telecom-friendly legislation,, it is rumored that Martin would support setting aside a portion of the spectrum for open-access usage by all devices, and that he is circulating the proposal among the other commissioners of the FCC.

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