ETF Logic Flaw

There is a flaw in the logic offered by AT&T, Verizon et al regarding the early termination fees (ETFs) on cellphone contracts. The argument, as cNet reported Thursday, is that the ETF minimizes the initial cost of the phone. In other words, part of the price of the phone is built-into the monthly service contract.

If this were truly the case, there would be two different pricing options for the air-and-data plan: one with subsidized equipment and one without. But there is not. If I want to subscribe to AT&T with a phone purchased in Asia or Europe, I pay the same monthly service fee as I would if I bought a “discounted” phone from the U.S. carrier. After I have fulfilled my contract obligation with my AT&T or Verizon phone, my air-and-data fees stay the same.

The carriers tacitly acknowledge that they are making a fallacious argument by pro-rating ETFs by $10 a month, whether the contract is for 12 months ($120) or 24 ($240). ETFs from Verizon are $175 – $350.

Yes, you now have 30 days to break a contract (change your mind). But this is a recent move on the part of the telecos; for example, here’s cNet on the S. 2033, Cell Phone Consumer Empowerment Act of 2007. (It didn’t pass.)

I’m not going to argue against all ETFs. But I believe that the way telephone carriers have been implementing ETFs — and I’ve owned a cellular phone for the better part of 20 years — is anticompetitive because it is an artificial lock-in. The lock-in would not be possible if the industry structure were competitive. But it’s not. It’s oligopolistic.

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