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Breaking up with your phone company can be expensive to do
[March 24, 2010]

Breaking up with your phone company can be expensive to do

Mar 24, 2010 (The Dallas Morning News - McClatchy-Tribune Information Services via COMTEX) -- Buying a new cellphone is a lot like diving into a Hollywood marriage, right down to the prenup.

No matter how hot, popular and versatile your new mate might be, you need to read the fine print to know what you're getting into and -- if need be -- how to get out.

Wireless carriers sell the vast majority of their phones below retail cost.

The catch is that you have to agree to a long-term contract with the carrier.

Fair trade, right?You get a less expensive phone and in return make a long-term commitment so the carrier can eventually turn a profit on that discounted device from your monthly service contract.

But cellphone passion is fickle.

Say you just bought a Droid from Verizon Wireless and Apple Inc. really knocks your socks off with a new iPhone this summer.

But you're only a year and a half into your two-year sentence with the carrier you once loved and now loathe.

You can make the jump, but you will need to pay for the privilege.

And how much you'll have to pay to get out of your contract depends on which carrier you're trying to escape.

For example, Dallas-based AT&T Inc. charges a flat $175 early termination fee for any subscriber who wants to cancel a long-term contract.

That fee is prorated, meaning that for every month you serve of your original 24-month commitment, AT&T knocks $5 off the fee.

"We think that's fair, because someone who has been with us longer should pay a lower early termination fee than someone who's just been with us a month or two, for example," said AT&T spokesman Mark Siegel.

AT&T started prorating its early termination fees in 2008.

In fact, each of the four major carriers now prorate their fees in one form or another, although the actual fees vary, as do the monthly reductions.

Early termination fees are much more customer-friendly than they were a few years ago, and, in some cases, even just a few weeks ago.

That's because prorating is a relatively recent phenomenon.

Carriers for years insisted that customers in month 23 of a 24-month contract should pay just as much to escape their commitments as customers in the first month. But eventually consumer and regulatory pressure led carriers to prorated termination fees.

Recently, the fees have come under scrutiny from the Federal Communications Commission and Congress, and again, customers have received a better deal.

For example, Verizon used to charge a $175 fee on all contracts. But late last year, Verizon upped the termination fee to $350 on some "advanced devices," including the popular Droid and other smart phones. That change earned the ire of several senators and the FCC.

Four senators proposed the Cell Phone Early Termination Fee, Transparency and Fairness Act, which would prohibit carriers from charging an early termination fee higher than the initial discount on the phone.

In other words, if Verizon gave you a $150 discount on your phone when you bought it, the early termination fee could be no more than $150. That bill is still pending.

But Congress wasn't the only branch of government to grumble.

The FCC also recently asked Verizon, AT&T, T-Mobile, Sprint Nextel Corp. and Google Inc. (which recently started directly selling its own phone, the Nexus One) to explain their termination fees and prorating policies.

As a result, Verizon trimmed the number of phones that qualified as advanced devices. And it said it would more clearly post the termination fees on displays next to the phones in its stores.

Google also took some heat for its unusual fee structure with the Nexus One. Right now, T-Mobile is the only carrier that offers that phone subsidized with a two-year contract.

However, if you get a Nexus One with a two-year deal with T-Mobile and decide to bail before your contract expires, you'll actually have two fees to pay.

T-Mobile collects a $200 early termination fee and, until recently, Google charged its own $350 "equipment recovery fee" to anyone who canceled their Nexus One service within the first 120 days of signing the two-year contract.

Cue grumbles, and cue Google backing down.

In February, Google announced it would cut its $350 fee to $150. Google said it had been working to cut that fee well before the FCC got involved and said the FCC's investigation was a mistake.

"It is important to note that our discussions with T-Mobile to modify the [equipment recovery fee] associated with the Nexus One predated the FCC's issuance of LOIs [letters of inquiry] to the four major nationwide wireless carriers and Google," the company wrote.

"In our view, the five LOIs are either too broad -- by including an entity like Google that is not a wireless carrier -- or too narrow -- by excluding other online retailers of wireless handsets." The FCC has not yet responded. However, the filings from Google and the carriers point to things wireless users should keep in mind.

The most important point to understand about these contracts and fees is that your two-year or one-year deal is designed to earn back for the carrier the cost of the discount you received when you bought your phone.

When you complete your term, that discount has been repaid, and then some.

The carriers don't disclose exactly how much of your monthly bill goes to repaying the subsidy.

"The term contract is designed to ensure a predictable stream of revenue during which Sprint earns back its customer acquisition costs, recoups its cost of providing service, and, ideally, makes a profit," Vonya McCann, Sprint's senior vice president of government affairs, wrote in the company's filing.

Once you finish your term, most carriers simply bump customers to month-to-month plans at the same rate they paid during their contracts. But remember, that rate includes the fee the carrier needed to charge to recoup its discount on the phone.

Now that you've already paid back that discount in full, staying on a monthly plan at the same price means you're essentially paying for a discount you already repaid.

So as soon as your two-year deal is up, the best thing to do is get another phone on another two-year deal.

That way, you get a new phone out of the bargain.

At least until a new phone on another carrier catches your wandering eye.

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