Would the elimination of ETFs make customers any happier?

It is time these out of touch judges,quit making up rules as they go. No one forced anyone to sign a contract for wireless service in the first place. All the major company offer pre-paid service. An all offer 30 trail periods. Everyone that sign a contract know what they are signing. They know they are getting a hugh discount on their headset for a 2 year committment of service. An if they break that committment there is a fee. If they don't agree to those terms, don't sign. They still have the option for prepaid service. This was a very easy case for the judge to decide, but I do think he or she was more consurn with getting there name in the headlines, than making or interperting sound law, an good judgement...

Consumers unite! Get the US Mobile Operators hand out of my pocket and wallet.

As an independent dealer that was put out of business this year, let me shed some light on inaccuracies in your report. Most of the dealers pay retail pricing for the handsets, which are then offered to the consumer below cost. If the consumer cancels the contract, the carrier pockets the ETF, the dealer does not get their subsidy back. The carrier makes a small profit on the phone, the dealer loses the commission, (if the service is canceled in the first 120 days), and the consumer keeps the device. Some carriers heavily subsidize the Wal-Marts of the world, again which just hurts the dealer, (and violate anti-trust laws), but know one cares.

Unless the ETF goes to the actual party subsidizing the device, and not just the carriers, it is just another profit center for the carrier.

One more in a long list of questionable behaviors in this industry.

I wouldn't call what I wrote inaccurate. I wasn't addressing who gets the subsidy or how that whole world plays out. I'm simply asking the question: Would consumers be happier without ETFs?--Lynnnette Luna

I don't understand your comment about prepaid plans: if the customer buys the phone up front, and prepays each month for service, why is there any risk at all to the carrier? It seems to me that if prepaid plans are more expensive for the consumer, that could be an indication that carriers are making additional money on postpaid plans which isn't obvious-- for example, the ETFs.

There is still some handset subsidies with prepaid plans, but not as much as postpaid,
so operators are hoping that customers up their prepaid plans on a regular basis. (Plus, the handsets are cheaper to begin with. We don't see any smartphones on prepaid plans.)That creates more risk, which is why per minute plans are more. And remember that these are unpredictable customers so the operator isn't guaranteed its $50 or so per month like it is with a postpaid customer. So I really don't think prepaid plans are all that lucrative.--Lynnette

Lets get real, all this is a function of there being a small number of suppliers in the industry.
The EFTs are far greater than the subsidy of the phone. If the customer would prefer a payment plan for his ipone, it would be FAR cheaper to pay 24% interest on a credit card than the incremental cost to ATT for 2 years. There is no concept of "informed consent" whereby the customer chooses a plan or a subsidy all other things being equal.

The real question is, Should it be against the law to bundle a device and service? And if not, should additional legislation or regulation be passed to restrict the ETFs that are offered by service providers and agreed to by consumers?

Do you know of any industry in which greater regulation has led to greater innovation and more consumer choice? If anything, it simply inserts legislators and regulators into the free market in a way that drives up costs and causes businesses to invest in lobbyists and lawyers, which are a dead weight drain on our economy.

Greater regulation is also often sought by incumbents to raise barriers to entry or favor an existing business model.

Today, consumers have the choice of buying phones without service bundled with them. The segment of consumers that believes that this is their best choice will buy these devices, though not for free or $50.

Under the banner of "protecting" consumers, "consumer groups" and crusading elected officials and regulators pander to the segment of the population that doesn't understand the benefits of free markets.

When these efforts lead to greater regulation, consumer choice declines and costs rise.

And more regulation is typically part of a never-ending spiral of still-greater regulation, which drives investment from innovation to lobbying and compliance.

You stated in your article that "ETFs exist to recoup the subsidy that mobile operators pay to offer cheap phones". Though that is the stated purpose, it is not entirely true, as I stated in my earlier post. AT&T did not have a subsidy on it's first i-Phone, yet it had an ETF. What was that paying for?

You are right. There is debate over whether ETFs are significantly higher than the actual subsidy. Your example seems to say so. But the net effect still seems to be that if ETFs were eliminated, that would have impact on handset prices.--Lynnette

Anytime you remove a revenue source, you will force an increase in cost, a reduction of service, etc. My issue with the ETF is that it doesn't exist because of it's stated purpose, it exists because the carriers feel they need more revenue, they want less churn when a customer is acquired, and this was an easy way to justify the cost. Pre-paid phones are also heavily subsidized in the Wal-Marts of the world, just not the independent dealers. To verify, look at a pre-paid phone price, then check it against an identical post-paid device. Suggested retail for the post-paid is very close to dealer cost, though the pre-paid will be significantly cheaper.

No one really cares, but I would like to see an accurate depiction of what the carriers use the ETFs for, not the phantom handset subsidy arguement.

Customer churn is a significant concern for cellular providers as it drives up sales/marketing costs. I believe that ETF's serve in part as a disincentive to changing providers (remember how the providers fought number portability) and think to that extent they should be reduced or eliminated.

I believe the scenario the author outlines is already the case in Europe, where there are separate markets for handsets and cellular service. It seems to work well there, and I would think will work well here as well, although there would be some adjustment due to changing expectations.

Dan Callahan

ETFs go to recoup a subsidized phone and a lower monthly rate plan. So in the case of iPhone 1.0, AT&T had an ETF to recover the subsidy to the lower monthly rates they offered customers in exchange for signing a 2 yr agreement.

These are not phantom charges. Just look at the carrier's 10-Ks on file with the SEC, the equipment subsidies are disclosed there and they are in the billions of dollars yearly.

They subsidize handsets they "sell" through their corporate stores and some of the big box retailers. They do not subsidize handsets sold through all of their dealer channels. Using that, independent dealers should be able to offer contracts without ETFs, or the ETF should be passed through to them when collected. In those cases, the ETF is unearned income. Just because the 10k says it, doesn't make it true, can you say Worldcom, Qwest, Enron, etc., etc., etc.

I have 3 months and 6 days let on my Sprint contract. My ETF amount is $200 and the discount I was offered on my Sprint Katana when I bought it was around $30. Somehow I think paying the full amount upfront and not having an ETF would actually save most people money. IMHO, ETF is nothing more than a high-tech form of indentured servitude.

The Sanyo Katana probably cost Sprint $140-$150...you probably got it for $49.99 or less, in fact I've seen it offered for free. In that case, Sprint is subsidizing that to the tune of $90 to $150. Not to mention the $200+ that they paid in commissions for your activation or upgrade. ETFs are needed to protect the interest of the carriers who have big upfront costs. They should however be prorated as most carriers are starting to do.

Most of the carriers do not require a contract, you can buy the phone without one but you have to pay a much higher price for the phone. That is in place today for most carriers, but the consumers want the best deal of course, which is to get $200 or so off the phone if you take a contract at the same time. Then, later, they bitch about the ETF when they themselves are responsible for not reading a contract. I think the government needs to get out of this business of trying to cover up for consumers who dont pay any attention at all to contracts and what they sign up for.

It doesn't matter why the carriers require an EFT. The consumer can weigh the pros and cons and decide whether to sign up for such a contract. There's enough competition in the cell phone industry. If consumers really wanted great customer service, no EFTs, and subsidized smart phones, then a carrier would emerge to offer such a plan. Probably at $300/month. Get my drift?

Sure hope all the whiners out there are happy when they get Congress or someone else who has no business sticking their noses into this DOES SO and phone prices jacked up into the stratosphere like they are in many other parts of the world.

Feel free you babies to run off and pay $600 or $800 or $1000 for the latest iPhone or Blackberry or whatever sans ETF contract. Me, I'll take the ETF'd contract and the $99 or $199 latest and greatest smartphone and laugh at you.

This is just funny! People will not want to pay full price for a phone when they know they can get it at a cheaper price just by going with a contract.

Personally using AT&T and the iPhone in relation to ETFs is not a good one. First and foremost, the iPhone is unique in the North American market. Think about it, Apple went to two carriers before AT&T accepted APPLE'S conditions. All other manufacturers are reduced to carrier subsidization of their phone. So that whole dichotomy - especially with the 1st gen iPhone - kinda kills the ETF argument.
As for the courts, the case should of been thrown out. Those people signed a legal contract, if they didn't read it all the way through, its not the carriers fault. It would be like me going to Nissan and telling them I am ending my lease early because I want a new car. Then telling them I shouldn't have to pay any fees what so ever for ending early because those fees are unfair. I guarantee you Nissan would have me in court real quick, with the judge telling me I owe Nissan some money. Am I making sense?

It's short sighted for people to think that without subsidies the phone prices would remain jacked up. A progressive scan DVD player can be purchased for $20. If the market model for DVD players (or other electronics) was for deep telco (or corporate) pockets to subsidize the cost, could you but one for $20? Let manufacturers compete at a price consumers are willing to pay; most consumers just want to make a call and complete messaging, and that technology is cheap!

And why do prepaid models work so well in the rest of the world? And with per second billing no less. Does Calling Party Pays (CPP) have something to do with that?

If she actually did her research on the case, she would have found that the California Court looked into the actual 'recoup the subsidy' excuse and found the average for a subsidy was $14.. thats right $14 bux!

I can see it, somewhat, on PDA phones but when the average Razer and other phones (Non-PDA) are only costing around $14, then the ETF of $150-$250 is WAY out of line and needs to be addressed.

See article for subsidy info: www.consumersunion.org/pub/core_telecom_and_utilities/005905.html

As it goes in contract law in general does not allow PENATLY clauses. it's VERY rare.. Telecomunication companys should be no exception.

Someone on August 4 wrote:
"These are not phantom charges. Just look at the carrier's 10-Ks on file with the SEC, the equipment subsidies are disclosed there and they are in the billions of dollars yearly."

100% FALSE. The Sprint and Verizon filings do not speak to "equipment subsidies" at all. Those numbers are customer acquisition and include ALL ADVERTING, Marketing, paperwork etc of setting up a new contract.