Remember when you were a kid, and you did something you weren’t supposed to, and your parents asked you about it? Maybe you just went ahead and admitted what you’d done and took whatever punishment your parents meted out. Or, if you were like most kids, you concocted some story to try to cover your tracks, maybe blaming someone else, or maybe just creating some sort of outlandish explanation for your actions. Either way, all the while, your parents knew exactly what you were up to, and probably just let you dig yourself deeper and deeper in your cock and bull story before punishing you anyway. Now imagine that you’re Verizon and your parents are the Federal Communications Commission (FCC), and they want to know why you decided to double the early termination fees (ETFs) on smartphones. But instead of just being honest and saying, “I figured it was a great way to make more money,” you embellished and came up with other reasons that sounded good at the time to try and make your decision seem more plausible and defensible. But your parents—sorry, the FCC—isn’t buying it. And now Verizon may be in even more trouble than it was to begin with. Back in November, Verizon stated its intention to double ETFs on smartphones from $175 to $350. First of all, the math doesn’t really work out when you consider that logically, the prorated ETF should reduce to zero by the end of a standard two-year contract. Aside from the that, the FCC just wanted to know why the wireless carrier was increasing the ETFs by so much. They requested a response from Verizon, and gave them until December 17 to respond. Verizon did respond by the deadline, but at least one FCC commissioner isn’t satisfied with Verizon’s reasons. Wireless carriers have long stated that ETFs are necessary to recoup what the company spent on handset subsidizing when a customer cancels their contract before it runs out. Customers are able to purchase handsets that cost hundreds of dollars at discounted prices—or even get them for free—because the cellular companies put up the majority of the cost so that high phone prices don’t turn customers away. They usually make this up very quickly, though, in monthly service fees, so ETFs already seem a little exorbitant. But in Verizon’s response, they admitted the doubled ETFs would be used for things other than recouping the cost of handset subsidies. Mignon Clyburn, one of the FCC’s five commissioners, finds this unsatisfactory. In a statement released by the FCC last Wednesday, Commissioner Clyburn outlined her concerns:
“The company’s answers…are unsatisfying and, in some cases, troubling. In particular, I am concerned about what appears to be a shifting and tenuous rationale for ETFs. No longer is the claim that ETFs are tied solely to the true cost of the wireless device; rather, they are now also used to foot the bill for ‘advertising costs, commissions for sales personnel, and store costs.’ Consumers already pay high monthly fees for voice and data designed to cover the costs of doing business. So when they are assessed excessive penalties, especially when they are near the end of their contract term, it is hard for me to believe that the public interest is being well served.”
Most people would agree with Commissioner Clyburn that Verizon seems to think they’ve come up with a way to make some extra cash by doubling ETFs and then rationalizing them. But Clyburn could also be going a little tougher on Verizon because of the report recently issued by the Government Accountability Office (GAO), which said the FCC wasn’t doing enough to protect consumers. Clyburn ended the statement by saying:
“These issues cannot be ignored. Wireless communications are an essential part of our lives, linking us to our places of business, our communities, and our loved ones. The bottom line is that wireless companies can truly earn their desired long-term commitments from consumers by focusing primarily on developing innovative products, maintaining affordable prices, and providing excellent customer service. I look forward to exploring this issue in greater depth with my colleagues in the New Year.”
Looks like Verizon will have even more to answer for now. Even if the FCC is cracking down just to get the GAO off their back, consumers should come out ahead. And Verizon should have paid a little more attention to what was going on within the government’s ranks before they tried to employ obfuscation as a method of response.