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Verizon Wireless has agreed to a US$21 million payout to settle lawsuits alleging that the wireless carrier's early termination fees (ETFs) were too high and unfair to consumers.
While Verizon has not admitted any wrongdoing in the case, the multi-million dollar settlement covers not only a California-based class action lawsuit but a variety of cases pending across the country as well.
The decision comes against the backdrop of the recent Federal Communications Commission (FCC) hearings held in June, as the government agency and Congress examine the fees customers must pay when they cancel a wireless phone contract before it expires. The costs can range from $150 to more than $200. The decision also comes as Sprint (NYSE: S) awaits a verdict in a similar case in California.
"Ours covers all the similar lawsuits nationally, not just in California. We wanted to put this behind us. Sprint is defending their current ETF practices, while we changed our ETF policy two years ago. So this is irrelevant to today and doesn't have anything to do with the way we handle ETFs today," Jim Gerace, a Verizon Wireless spokesperson, told CRM Buyer.
Depends on How You Look At It
One's stance on ETFs depends on one's worldview, according to Bill Hughes, an In-Stat analyst.
One viewpoint is that "ETFs are just another tool used by evil companies that are looking to exploit the naiveté of consumers caught up in a system that they cannot hope to understand. It is the proper role of the government to protect these simple rubes," he explained.
Another viewpoint, he said, sees consumers as logical decision-makers that, while influenced by merchandising techniques such as those provided by wireless operators, are perfectly capable of entering into contracts, and only sub-optimal results can come from governmental interference in abrogating valid commercial contracts for political reasons.
In reality, however, most people seem to fall somewhere in between the two, though the first worldview makes for good press, he told CRM Buyer.
"It is currently an issue relating to the sub-prime mortgage situation in addition to ETFs," Hughes pointed out.
While Hughes acknowledged trending more toward the latter view, FCC Chairman Kevin Martin -- who has affirmed his belief in the fees -- seems to fall more toward the middle. During the hearings in June, the FCC head voiced his concern that ETFs are not being used by wireless operators to offset costs, "but as a means of locking consumers into a service provider."
The wireless operators contend, however, that the fees help make up for the subsidies the companies offer customers when they purchase a mobile handset with a standard two-year contract. For example, AT&T (NYSE: T) charges new subscribers with a two-year contract as little as $199 for the new 3G iPhone. Meanwhile, subscribers who refuse to be tied to AT&T for 24 months can purchase the same handset for $599.
"The way some [state] government[s] have addressed the merchandising technique of subsidies is to ban them altogether as being anti-competitive. California was one of the governments that had this position. In the early 1990s, wireless operators did not offer subsidies in California," Hughes explained.
Most carriers, including Verizon, have altered their ETF policies and implemented the practice of prorating the fees based on the length of time remaining on the contract.
"All in all, $21 million to get out of a lawsuit is not that much of a ticket to pay. Perhaps the answer is that all wireless operators will stop having subsidies in California. Still another possibility is that the outcome of the FCC ruling on ETFs could make the California laws moot," Hughes concluded, though he said the latter outcome was doubtful.
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