AT&T raises early termination fee on smartphones

Increase could be tied to next iPhone launch and possible loss of exclusive iPhone deal, some say

AT&T Inc. announced today that its early termination fees for new and renewing smartphone and netbook customers will jump from $175 to $325 on June 1, following similar actions by other carriers.

In an open letter to customers, AT&T also said that it will drop the early termination fees for new and renewing customers who use basic and quick messaging phones by $25 to $150 on that date.

A spokesman refused to comment beyond the contents of the letter, which said the early termination fees make it possible for AT&T to offer industry-leading phones below their full retail prices in exchange for a two-year service commitment. For example, a $199 Apple iPhone would cost $599 without a contract. AT&T has said that iPhone customers pay on average more than $90 in service fees each month.

Some bloggers have theorized that AT&T's increase in its smartphone early termination fees is timed to go into effect just prior to Apple's announcement of a next-generation iPhone, and some are speculating that the fees are going up because AT&T could be losing its exclusive right to sell the iPhone in the U.S. within the next year, after years of complaints from users about the AT&T network.

Presumably, higher fees would discourage AT&T iPhone customers from switching to another wireless service if other carriers are allowed to start offering the iPhone. AT&T wouldn't comment on that theory.

AT&T said the new early termination fees, which won't apply to current customers unless they renew after June 1, will decline by $10 a month over the life of a two-year contract for smartphone users and by $4 a month for users of basic and quick messaging phones.

Jeff Kagan, an independent telecommunications analyst, said carriers are basically offering consumers subsidies or loans when they sell phones at reduced prices to customers who sign long-term service contracts. He noted that early termination fees and subsidies are mostly U.S. traditions.

"Phones are expensive," Kagan said. "In many countries without early termination fees, the customers are required to pay the full $500 or more for a phone. In the United States, [carriers] started subsidizing and continue doing it today. When a carrier helps a customer buy a phone by giving them a loan of sorts, the customer agrees to repay that loan" -- essentially through the early termination fee.

Kagan pointed out that when a customer of any type defaults on any kind of loan, there is a penalty involved. "The reason for the ETF is to protect the carriers from losing money when they give the customer a loan of sorts," he said.

Early termination fees have been controversial. They have been the subject of lawsuits by customers, and in January the Federal Communications Commission launched an investigation into excessively high termination fees.

Verizon Wireless doubled its early termination fee on "advanced devices," mainly smartphones, to $350 last November. And in January, Google Inc. and T-Mobile USA jointly imposed an early termination fee of $550 on the Nexus One smartphone.

In response to criticism, Google lowered its part of the Nexus One fee from $350 to $150 in February.

Verizon responded to concerns from the FCC by reducing the number of advanced devices affected by its higher early termination fee.

Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld. Follow Matt on Twitter at @matthamblen, or subscribe to Matt's RSS feed. His e-mail address is mhamblen@computerworld.com.

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