Competitive Enterprise Institute | 1899 L ST NW Floor 12, Washington, DC 20036 | Phone: 202-331-1010 | Fax: 202-331-0640
D.C., June 12, 2008—Today the
Federal Communications Commission will
hear testimony  on “early termination” fees for customers who cancel their mobile
phone, cable or Internet service contracts early. Critics of telecom service
providers will charge that long-term contracts with cancellation fees are
unfair, but in reality, such contracts help more people afford a higher-quality
range of products.
In the case of mobile phones, many companies provide
customers with low-cost or even free phones in return for customers agreeing to
a service contract, often of one to two years. That agreement puts better
phones in the hands of customers at every price level, while bringing into the
market many who could otherwise not afford a phone at all.
Since the provider is counting on the future revenue from
the contract as part of the bargain, they include the early termination fee as
insurance that they won’t subsidize the equipment costs of customers only to
have them immediately jump to other carriers offering yet other deals.
Moreover, despite opposition to
early termination fees in the mobile phone market, they’re nothing new. Aside
from telecom services, consumers have long had the choice of signing long-term
contracts that involve early cancellation charges. Renters typically sign
12-month apartment leases, and are usually required to pay a breakage fee if
they back out of their lease early. Similar contract clauses are often found in
fitness center memberships and automobile leases.
In all of those cases, we expect
consumers to figure out for themselves what is and what is not part of the
contract they’re signing. As long as any potential fees are disclosed at the
time of the agreement, they’re simply part of the deal. In the case of a
provider attempting to levy a fee that wasn’t part of the original agreement,
that’s a case for small claims court, not the further federal regulation of an
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