In the cell phone business, catching and, especially, keeping a customer can be worth thousands of dollars in profits stretching over many years. No wonder the service providers want to lock customers into long-term contracts that charge fat fees if they cancel.
Talk about stifling competition. Customers, shackled to their cell phones by one-and two-year contracts with punitive cancellation provisions, are hesitant to jump ship if they find a company offering better rates and better service. That can leave them stuck with phones and networks with scratchy and spotty reception, if that, and early termination fees of $175 or more.
Even more annoying is the practice of some firms of adding years to those contracts whenever a customer wants to alter the service. Sure, we can add free minutes to your plan; that’ll be another year in cell phone bondage.
Consumer advocates make a good argument for banning termination fees, but that doesn’t seem to be where things are headed.
The Associated Press reports that the Federal Communications Commission is considering a proposal to require companies to charge gradually lower termination fees over the life of cell phone contracts. But the companies would get something in return: immunity from class-action lawsuits over the contracts that are brewing in several states. Phone companies are worried that they’ll face spectacular  judgements if the cases go to trial.
Chris Murray, senior counsel at Consumers Union, which has criticized cell phone contracts, says the phone companies would get a lot more from that deal than they’d lose. “A $1 billion get-out-of-court-free card,” he calls it.
Congress also is applying pressure. Sen. Amy Klobuchar, D-Minn., has introduced a “cell phone bill of rights” that would require penalties to be pro-rated over time. Customers also would get a grace period in which they could cancel a contract with no penalty.
In the face of such pressure, the large cellular service providers have been rolling back termination fees. Starting next week, for example, AT&T will reduce its $175 termination fee by $5 for every month of a contract. A customer who canceled after six months would pay $145. AT&T spokesman Mark Siegel notes that the company already offers a free 30-day cancellation period for new subscribers. Other companies do as well.
The phone companies argue that ending termination fees would raise costs for customers. Those offers for free or reduced-price phones for signing up would disappear if long-term contracts are banned.
Siegel notes that customers who don’t like long-term commitments can get cell phones through pre-paid plans or pay-by-the-month plans that are offered to people with good credit.
There’s something to be said for that. If people are willing to lock themselves in for two years in exchange for a cheap rate, what’s the harm?
The problem is that the fast-changing phone market thrives on competition; the fiercer the better. When millions of customers are locked out of the market, there’s less incentive for a competitor to offer lower prices or cool new services.
Cell phone termination fees should severely limited. If the FCC won’t act, Congress should.