Verizon: Even with higher termination fees, we still lose money
Verizon has filed its response to a December 4 Federal Communications Commission probe which examined the carrier's recent increase to early termination fees for subscribers with "advanced devices" such as BlackBerry, Windows Mobile, Android and Palm handsets.
The FCC asked why such an increase was necessary, how customers are informed of the new fees, and why the fee is not prorated all the way down to zero.
Unsurprisingly, Verizon said the increased early termination fees reflect the higher cost of these advanced devices and their larger subsidies (a.k.a., cost differential), the higher costs and risks of providing mobile broadband services, as well as the costs of advertising, commission, store costs, and general network upkeep.
What is surprising, though, is how much Verizon says it loses when a customer cancels his contract early.
"The $350 ETF for Advanced Devices reflects the substantially higher costs and risks of providing mobile broadband service. Verizon Wireless incurs these costs with the expectation that customers will enable Verizon Wireless to recoup them over time. Indeed, a customer with an Advanced Device on a voice and data service plan typically agrees to pay substantially more in monthly service fees, as compared to a customer with a more basic phone on a voice-only plan. The $350 ETF does not fully compensate Verizon Wireless for all these costs, particularly for customers who terminate at a relatively early point in the contract term," the company's response to the FCC said.
"On average, customers who terminated early did so with more than twelve months still left on their contracts," the company continued. "Verizon Wireless estimates that, at the twelve month point in the contract term, its typical loss from the early termination is more than double the applicable remaining ETF amount for an Advanced Device."
In other words, if a customer terminates his two-year contract halfway through, he'll have to pay a $230 Early Termination Fee. Despite this, Verizon estimates that it's still losing $460 out of the deal.
Currently, the $350 Early Termination Fee is prorated by $10 a month until the end of the customer's contract, meaning it never reaches zero.
Verizon said, "Prorating the ETF to zero in the last month would mean that, to recoup the same amount of the losses caused by early terminations as a whole, Verizon Wireless would have to set the starting amount for the ETF higher than $350. Customers as a whole would be worse off if Verizon Wireless were to take this approach because early terminations occur disproportionately in the early part of the contract term and relatively few customers terminate near the end of the contract term."