American cellular phone companies originally structured their service to entice new customers with heavily subsidized handsets in exchange for a nearly iron clad two year contract. If a consumer wanted to ditch their contract early, they faced an Early Termination Fee (EFT) of between $175 to $350. This EFT sought to recover losses from the subsidized handsets, but also acted as an incentive to stop churning customers. This practice did not always settle well with consumers stuck with lemon phones or if cellular coverage was wanting so a consumer wanted to stop service
There was some legal ambiguity as to whether the EFTs were considered “rates charged” and “other terms and conditions”, which would make it subject to the Federal Communication Act and thereby preempt state lawsuits. In 2005, the Cellular Telephone and Internet Association requested a declaratory ruling from the FCC on the matter. Alas there was not regulatory clarity on this multi-million dollar linguistic interpretation, but many carriers started to pro-rate their fees.
In 2009, Verizon Wireless, the nation’s largest cellular provider, doubled its EFT to $350 for "advanced devices” (i.e. smart phones), at which point the Federal Government exhibited agitation. There were Congressional hearing and the chairman of the independent Federal Communications Commission Julius Genachowski spoke about the sticker shock of EFTs and vowed to step up consumer protection about early termination fees while ensuring that carriers were adequately compensated for their subsidized handsets.
Cellular service providers got the message that both Uncle Sam and consumers were unhappy, so they figured out other ways to cut their losses. Recently, T-Mobile tried to co-opt a European approach by not offering subsidized handsets with supposedly lower monthly plan rates. Not being locked into a contract offers the illusion of freedom, but full freight for a smart phone can be $600 up-front and consumers could walk away with their GSM phones and go to ATT or a Mobile Virtual Network Operator (MVNO) such as Wal-Mart’s Straight Talk to get lower rates.
While many cellular consumers like the notion of not being bound by an iron clad contract, what they really want is to feed their fetish for a constantly current cell phone. Whether a consumer is locked into a two year contract or paying the full sticker price for a smart phone, there are still ties to a handset which makes a consumer chary to switch.
Several of the major cellular carriers are accommodating the consumer desire for constantly current cell phones with new programs.
T-Mobile’s Jump program is a no-contract cellphone customers who pay an extra $10 a month for insurance and Jump plan participation. T-Mobile typically runs a credit check on prospective new customers in order to determine how much of a down-payment is required for a phone purchase in 20 monthly installments on top of your phone plan (although T-Mobile stresses that everyone eventually pays the same price for the handset). But if you are a Jump plan participant, after six months a consumer can trade in an old handset and purchase another on a 20 month installments, but the consumer is no longer responsible for payments on the old handset. Of course, if a customer wants to keep the handset, he must pay the remainder of the balance of the installments.
There are two caveats to T-Mobile’s Jump Plan. Firstly, a consumer needs to pay the tax on the full phone (e.g. with a 6% tax a $600 phone would cost $36 tax on top of whatever down-payment is required). Moreover, the Jump Plan trade in phone needs to be in working and in good condition. But since the Jump Plan also has built in insurance so one could make a claim with the Premium Handset Security Protection Plan and pay the up to $175 and trade in the fixed (or more likely refurbished) phone which T-Mobile returns to you. Currently, T-Mobile is offering a zero down on many handsets (eliminating the down-payment) but check with T-Mobile to determine if this promotion is still available to you.
AT and T Next is a way for an AT and T customer to get a new phone every year. When a customer chooses AT and T Next, the price of their technology is broken into 20 monthly installments (with no finance charges). At the time of purchase, the customer does not have to make a down-payment but must pay the full sales tax. After 12 monthly payments, a customer can trade in his device and receive a new one, and no further payments are required on the old device and the customer starts over on a new installment plan with no activation or upgrade fee. After 20 months, a customer does not need to make more monthly payments and the superannuated telephonic toy is yours to keep.
For AT and T Next, a customer must remain in good standing and the trade in must be in good working condition. Of course AT and T reserves the rights to change terms and conditions. A savvy consumer not committed to one major cellular carrier should closely scrutinize what the sticker price is on a cell phone. Mac Rumors noted that AT and T needed to lower the monthly installment price for an Apple i-Phone 5 by $5.50 a month to undercut Verizon’s price.
Now Verizon seeks to cut into this anxious upgrade consumer segment with Verizon Edge on August 25th 2013. The Verizon Early Upgrade Program entails a consumer purchasing a phone on a month to month plan and the full retail price is broken up into 24 installments. When purchasing the phone, the consumer makes the first equipment payment and presumably pays sales tax on the full retail price of the device.
With Verizon’s Edge, after six months, a consumer can choose to upgrade if he has paid 50% of the full retail price of the handset and returns the working handset. A consumer need not pony up supplemental cash to upgrade after making 12 monthly installments and also surrendering the device. There are no upgrade fees or finance fees attached. The other catch is that a Verizon Edge consumer still pays the high phone plan rate which other consumers have subsidized handsets with a two year contract.
For the electronics addict who craves the latest and greatest technology, the T-Mobile Jump, AT and T Next or Verizon Edge might seem like an attractive offer. T-Mobile’s deal requires insurance which costs extra but could effectively be seen as a $60 early upgrade fee. The downside with T-Mobile’s early upgrade offer is potentially requiring a down-payment for the handset to less credit worthy customer. Verizon Edge may allow for an early upgrade after six months, but one will wait a year of installment payments to get to the 50% sticker price which has no fees attached. AT and T Next requires a consumer to wait for a year to get his “next” early upgrade, but AT and T has a track record of inflating the full retail price of its I-Phone and AT and T has not lowered its phone plan rates like T-Mobile so caveat emptor.
These early upgrade programs are a good compromise which allows service providers to re-coop costs on handsets without EFTs while effectively locking consumers into relationships with cell phone providers without an iron clad handshake. Consumers who opt into early upgrade programs can get the latest and greatest (at that moment) technology and not be stuck waiting so long for an upgrade. And these plans did not require government mandates or Uncle Sam engineering the marketplace.
But this cell phone flexibility does come at a cost. CNET notes that a customer upgrading every year would pay $55 extra for the privilege of AT and T Next. But if a customer held on to the phone for 20 months, he paid full retail for a phone which others received as a subsidized handset. So it is crucial for consumers using these programs to be sure that they actually want to do early upgrades.
Personally, I am more worried about having favorable cell phone plan rates and coverage rather than periodically having a shiny new telephony toy. However, I appreciate that I am in the minority in the marketplace. As for those who have a phone fetish to always have the latest and greatest, my tongue in cheek advice is : “Next, Edge, Jump”!
h/t: Mac Rumors
George Washington Law Review
h/t: Mac Rumors
George Washington Law Review