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FCC Questions Telcos, Google on Early Termination Fees

Inquiry comes on heels of Verizon price hike, Nexus One intro

In the wake of complaints over Verizon's doubling of its contract early termination fees (ETFs) for certain high-end phones, and Google's new Nexus One smartphone coming with a set of hefty fees of its own, the Federal Communications Commission (FCC) today sent letters to all four major wireless carriers and Google, asking for more information behind their decisions to charge customers such high rates.

"This inquiry is the first action by the FCCs Consumer Task Force, which was launched last week to tackle these kinds of issues," said FCC chairman Julius Genachowski. "I look forward to reviewing the responses to the letters and the recommendations from staff regarding next steps."

The letters asked each carrier and Google to explain how its ETF plan worked, how much it cost customers, whether alternatives were available, and if customers would incur any additional or "hidden" fees over the course of purchasing a new phone or taking on a contract.

"How much of a discount on handset purchase is given in return for a consumer accepting an ETF?," the agency asked AT&T. "Does the amount of the discount differ by device, and if so, how?"

Google provoked special interest from the FCC due to its introduction of the Nexus One, one of the first high-end smartphones to be sold without a proprietary agreement with a major wireless carrier.

The agency commended Google for offering customers more choices in the market, but was not without its concerns.

"The combination of ETFs from Google and T-Mobile for the Nexus One is also unique among the four major national carriers," the agencysaid. "Consumers have been surprised by this policy and by its financial impact."

The FCC's comment refers to the reported multiple ETFs a customer can incur if they buy a subsidized Nexus One under the T-Mobile plan. If they cancel the phone within six months, they will incur the typical $200 fee, but they may also be charged an "equipment recovery fee" by Google if they cancel the plan within four months.

Users who buy a Nexus One unlocked and unsubsidized, however, are not charged any fees beyond the initial purchase price.

The cost of actually putting together a Nexus One was estimated at $175.

"Various competitive options"

Critics claim Google, like other wireless carriers, may be using ETFs chiefly as a way to ensure customers stay locked in to a contract for fear of incurring charges with early cancellations.

Wireless carriers claim that ETFs are necessary to subsidize the investment in building, selling, and marketing the phone, enabling customers to buy them cheaply.

Verizon Wireless argued to the FCC that the doubling of its ETF was needed for the costs of advertising and fully recouping its investment in the sale of high-end phones such as the Droid.

CTIA, the lobbying organization representing the major wireless carriers, said that "consumers in the United States have many options for subsidized handsets and lower priced plans that most consumers around the world do not have. This should be the goal of all of us, to give consumers the choice to pick among various competitive options."

Consumer advocacy group Free Press said "[t]he FCC should be cheered for continuing to press for more information about the widespread anticompetitive practice of restricting consumer freedom through shockingly high early termination fees."

"Excessive and poorly disclosed early termination fees are a symptom of the dire need for FCC intervention in a broken market," said Free Press Policy Counsel Chris Riley. "The state of consumer disclosure must be improved for there to be any hope of meaningful competition in the wireless industry."

Numerous lawsuits, mostly on the state level, from wireless customers unhappy with ETFs, and pressure from Congress has led all four major wireless carriers to prorate their fees over the life of the contract, usually two years.

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