Scrutiny of Phone Fees May Broaden to TV, Internet

FCC Chairman Kevin J. Martin said the hearing on early-termination fees will attempt to rein in complaints that have begun spread to other industries.
FCC Chairman Kevin J. Martin said the hearing on early-termination fees will attempt to rein in complaints that have begun spread to other industries. (By Manuel Balce Ceneta -- Associated Press)
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By Cecilia Kang
Washington Post Staff Writer
Saturday, May 31, 2008

A planned federal hearing on penalties that cellphone users pay for canceling their contracts early may be expanded to include a discussion on similar fees for ending cable and Internet services ahead of schedule, the chairman of the Federal Communications Commission said in an interview yesterday.

FCC Chairman Kevin J. Martin said the June 12 hearing on early-termination fees will be broad-reaching, an attempt to rein in complaints that have begun to spread to other industries.

"The issue has been highlighted in the context of the wireless industry, but what I'd also point out is that this is a practice that seems to be migrating to other platforms," Martin said. "To the extent that the commission takes action and says that these kinds of practices are reasonable and these are not, that could have implications for other industries."

The attention to cancellation fees illustrates a growing frustration among consumers, who spend an average of $200 each month for wireless phone, cable and Internet services. Many see the fees as an unfair penalty that makes it difficult to switch providers. Early-termination fees were among the five most common complaints by cellphone users, who filed 20,300 service-related complaints in 2007, according to the FCC.

Many wireless companies are fighting lawsuits seeking hundreds of millions of dollars in fees that have been collected from former subscribers. Cable, DSL Internet and paid television services such as Verizon's FiOS also have had an increase in complaints from consumers about early-termination fees.

Now wireless carriers are pushing a policy that, if adopted, could provide relief from the fines, which typically range from $150 to $200. Verizon and AT&T have recently softened their policies, with prorated plans that would knock down the penalty by $5 for each month of service. T-Mobile intends to introduce a similar plan next month; Sprint has promised to follow suit by the end of the year. The proposals being discussed by carriers and the FCC would provide more safeguards, such as a 30-day grace period and no penalties for subscribers who extend their contracts.

In exchange, carriers are asking for protection from the numerous lawsuits underway in California and other state courts.

"This is less about the revenues the carriers will lose because of the [Fee] issue and more about the lawsuits and how this will lessen the lock that carriers have on customers," said Rebecca Arbogast, an analyst at the brokerage and investment banking firm Stifel Nicolaus.

Wireless carriers, however, argue that cancellation fees are linked to the discounts they provide for cellphones. They say they are able to offer cheap phones because they pick up much of the costs charged by manufacturers. Those costs are made up over the length of a one- to two-year contract, they say.

Early-termination fees "are critical to keeping wireless rates affordable and in these economic times that becomes even more critical," said Joe Farren, a spokesman for CTIA, a trade group that represents the wireless industry.

It's the same argument the carriers have made for why they have in some cases locked their phones, or made them unusable on competing networks. The Supreme Court, however, last week upheld the right of consumers to pursue a class-action suit against T-Mobile and AT&T on their phone-locking policies. Verizon Wireless and Sprint Nextel agreed to provide the software code to unlock cellphones after customers nationwide have completed their original contract.

At stake is $1 billion in potential damages faced by Verizon Wireless in a class-action suit in California on termination fees. A similar suit is underway against Sprint Nextel in a California court.

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