Would the elimination of ETFs make customers any happier?

What has become abundantly clear is that people hate early termination fees (ETFs). This, of course, is evidenced by the class-action lawsuits, loud complaints from consumer advocacy groups and the many complaints the FCC has received about fees. Just last week, a California judge ruled that Sprint Nextel must pay $73 million in refunds to its former customers in a lawsuit over early termination fees.

As such, the FCC is considering a nationwide ETF policy for carriers, and Verizon has advocated that the commission adopt rules that are similar to what the operator has in place. For example, carriers should offer opt-out or trial periods for new contracts; provide pro-rated ETFs; and offer no ETFs for contract renewals unless the consumer gets a new device as part of the deal.

Those sound like reasonable terms, but do they go far enough to please consumer advocates and Congress, which has also threatened to become involved? During an FCC hearing on the matter in June, consumer advocates and state regulatory officials said that even pro-rating fees is not enough. Anne Boyle, chair of the Nebraska Public Service Commission, said the fees should be ended altogether.

"The industry should do away with these contracts and let people purchase the products on their own and pay for service on a month-to-month basis," she was quoted as saying in a CNet article. "It's the most common method for providing products and services in this country." (By the way, there are contractless options that let people purchase products on their own and pay on a month-to-month basis. They're called prepaid plans, and they're more expensive because the customer is considered a bigger risk without a contract.)

If Boyle thinks these types of changes would make consumers any happier, she should think again. ETFs exist to recoup the subsidy that mobile operators pay to offer cheap phones. Just look at the iPhone 3G as an example. AT&T and Apple obviously came to the conclusion that this device should be subsidized to the $200 level in order to drive mass-market adoption of the service. Consumers clearly have preferred to pay less for a device, and they have been willing to sign a two-year agreement with cancellation fees to do it. They do the same to rent apartments, lease cars and join gyms.

What the FCC and other potential regulators need to think about is what the outcome of eliminating ETFs altogether would be. Would it truly create a more competitive marketplace since consumers in theory would have more freedom to shop around? Or would the price of service and handsets jump across the board from $50 to $500, making wireless less attainable for many?  --Lynnette

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