The FCC held a hearing on early termination fees for cell phones, cable, ISPs, and pretty much everything else other than leases on cars and apartments. After the hearing, FCC Chairman Kevin Martin stated that he wanted the FCC to meet and act in July or August on cell phone fees. Following a hodgepodge of state laws and lawsuits, Verizon declared that a simple federal rule on the fees would be preferable to confusion.
That simple federal rule should be none. The troubles with regulating early termination fees, as my colleagues Cord Blomquist and Ryan Young have pointed out, are numerous. Early termination fees are essentially a private mechanism of enforcing long-term contracts. Instead of taking each early terminator to court every time, the two parties simply agree in advance on conditions under which the contract can be terminated. Without such an enforcement mechanism, long-term contracts would be nearly impossible. And such contracts allow wireless companies to give deep discounts on phones, provide revenue predictability, and spur innovation. Further, a paternalistic policy that bans such contracts discourages customers from reading the agreements they sign, providing a disincentive for personal responsibility.
Nothing demonstrates the unintended consequences of FCC action on termination fees better than the comments of Martin himself. According to CNN, Martin proposed that “termination fees should not kick in until after the customer has received and reviewed the first bill.” Could subsidized phones exist in such a market? Who will give me a free phone if I can just take it and run off to another carrier, before paying a single bill? If Martin gets his way, the cell phone market will be radically different than the one that we know – and cell phones may once again become a luxury for those with lots of cash.