Cell phone fee needs terminating

Before you go shopping for a new smart phone this holiday season, keep this in mind: Verizon Wireless, the largest provider of mobile-phone services, has just doubled its early termination fee for high-end handsets if you decide you would rather go with a different carrier.

It was bad enough when the company would slap you with a $175 charge for jumping ship after a 30-day trial period. Now that penalty is $350.

The fee applies to BlackBerrys, the much-touted new Droid phones, and other smart phones capable of sending and receiving text messages and e-mail, and accessing the Internet.

"We increased the early termination fee for advanced devices to reflect the higher costs associated with offering those particular devices to consumers at attractive prices and investing in our network to support these devices," said Ken Muche, a spokesman for Verizon Wireless. "These costs are higher because advanced devices require more complex chip sets, microprocessors and licensed software that perform more functions than other phones."

But consumer advocates and some customers say that high early termination fees are a way to hold people hostage.

Wireless companies say they offer customers choices. But those choices aren't always clear or particularly beneficial for anyone but the company.

Muche said Verizon smart phone customers can choose not to have a two-year contract and can pick a one-year plan or pay on a month-to-month basis. But if you do opt for month-to-month payments, you'll have to pay the full price for your smart phone.

A Google-powered Droid phone, for example, will run you $299.99 with a two-year contract from Verizon. The price jumps to $369.99 with a one-year contract.

If you skip the contract, that Droid will cost $559.99, not including monthly service charges beginning at $39.99.

Muche said the company makes this distinction clear to consumers. But when I visited Verizon's Web site and checked out the smart phones available, the default pricing for the Droid was $299.99, accompanied by a two-year contract (and a $100 discount for shopping online).

The only way I would have known that I could go with a one-year contract or pay month-to-month was if I had noticed a small box at the top of the page that changes the price settings or if I clicked through to another page containing more info about each phone.

Had I proceeded straight to checkout, I wouldn't have been offered another option. Although Verizon's $350 fee sets a high-water mark for such penalties, it's in keeping with the industry practice of offering cool handsets at reduced prices in return for customers agreeing to a long-term contract.

AT&T, for example, will smack you with a $175 fee if you exit your iPhone contract before two years are up.

"This isn't about subsidies," said Joel Kelsey, telecom policy analyst for Consumers Union. "It's about punishing people for leaving the provider."

He noted that Verizon will lower its early termination fee by $10 a month for each month you're with the company. But even if you stay for the full two years, your early termination fee still would be $110.

"If this was really a subsidy, that fee should be zero by the end of the contract," Kelsey said. "This shows that the early termination fees they're charging don't actually reflect the cost of the discounted phone."

Moreover, he pointed out that even if you did buy your phone separately you still would be paying the same amount for a Verizon service plan as someone with a subsidized phone.

To me, this is the key point.

The way things work now, consumers have a tough time knowing the actual cost of products and services they get from telecom companies. Phone manufacturers and service providers enter into deals, and the pricing gets muddled.

The first way to untangle this would be to end wireless exclusivity. All phones should work on all compatible networks.

Meanwhile, let's end this practice of service providers "subsidizing" a product they don't even make. If there's anything that service providers should be discounting, it's service.

So if a company like Verizon or AT&T wants to lock you into a two-year contract, let it offer wireless service at a lower cost.

A reasonable early termination fee could be charged if you leave early, to reflect your not keeping your end of the bargain.

As with handsets, it's hard not to think that service providers would end up competing more aggressively on price and on wireless speeds and coverage areas.

This was the point of deregulating the telecom market in 1996 - boosting competition among service providers. But all it's done is make the market murkier, as Verizon's $350 fee illustrates.

Time to let in a little sunshine.