FCC Targets Long-Term Service Plans

Are you a mobile phone user, FiOS TV subscriber, or DirecTV customer who’s happy with your service and bound by a long-term contract? If so, then brace for higher prices thanks to a multifaceted regulatory assault on voluntary contracts.

On June 12, the FCC will hold a hearing to consider imposing regulations on early termination fees, which are the charges that customers who’ve entered into long-term service agreements must pay if they choose to end service prior to the culmination of their contract term.

The FCC isn’t alone in its push to regulate early termination fees. Bills that would limit wireless contract terms have been drafted in both the Senate (by Sens. Klobuchar and Rockefeller) and in the House (by Rep. Markey). And Verizon, among other carriers, faces a $1 billion class-action lawsuit arguing its early termination fees are illegal.

While the bills pending in Congress focus solely on early termination fees for mobile service, the Washington Post reports that the FCC’s upcoming hearing will encompass early termination fees offered by all kinds of consumer telecom services. In addition to wireless companies, many broadband and video providers including DirecTV, Verizon, RCN, and Comcast also offer long-term service plans with cancellation charges levied on customers who end service early.

In late 2007, when the early termination fee debate began heating up, many providers changed their policies to address complaints against wireless contract provisions. Now, AT&T Mobility, Verizon Wireless, and Sprint all prorate early termination fees for wireless subscribers, so users who cancel service in the middle of the contract term don’t have to pay the full $175 early termination fee. The three carriers have also begun allowing customers to change calling plans without affecting their contract end date.

Despite intensifying opposition to early termination fees, these fees are really 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. Are all these incarnations of early termination fees fair game for government regulation, too?

Dictating the terms of telecommunications service contracts runs the risk of depressing investment in network modernization, ultimately harming consumers. At a time when Sprint is building a high-speed wireless network from the ground up, Verizon is laying fiber to millions of homes across the nation, and DirecTV is expanding its fleet of geosynchronous orbital satellites, government-imposed revenue volatility would delay next-generation telecom services that promise faster broadband speeds and more high-def programming.

Advocates of regulating early termination fees also ignore the fact that consumers have plenty of alternatives to long-term service plans. Both DirecTV and Verizon’s FiOS TV, for example. are available either with or without a long-term agreement. And in the cell phone business, nearly every major provider offers prepaid, month-to-month plans with no service obligations. (AT&T GoPhone, Verizon Wireless InPulse, Boost Mobile by Sprint, T-Mobile PrePaid). In all these cases, the price differential between contract-based and month-to-month service is perfectly transparent, allowing consumers to consciously decide which type of service better fits their needs.

Short-term plans are often priced higher than equivalent long-term plans, but that’s not always the case. Virgin Mobile USA, a mobile “virtual network operator” that resells access to Sprint Nextel’s wireless network, offers monthly plans at prices that are very competitive with those offered through comparable long-term plans.

Besides, it’s no secret that long-term service plans include early termination fees for customers who quit before the contract is over. Why should government intervene simply because some consumers are signing contracts without reading all the fine print? Signing your name on a binding legal contract without knowing exactly what you are committing to is a dereliction of personal responsibility, and hardly justifies regulatory intervention. Instead of complaining to lawmakers about early termination fees, consumers irked by service commitments would be wise to opt for plans that don’t involve long-term agreements.

And what about customers who don’t mind signing long-term contracts? Not all people feel the need to hop from carrier to carrier all the time. Many users have made an informed choice to commit to service for a year or two in exchange for lower prices and better perks. I’ve been a Verizon Wireless subscriber since 2002, and I don’t intend to switch providers anytime soon.

Even if I could cancel my contract without any fees, chances are I’d still stick with my current carrier, as I’m largely satisfied with VZW’s network coverage and phone selection. For consumers in the same boat as me, imposing regulations on early termination fees is all pain, no gain–what matters to us is low prices and subsidized phones, not the freedom to switch carriers willy-nilly.

As Braden Cox noted nearly four years ago, buyers must beware of signing contracts in a free market. Government regulation of early termination fees is “ill-suited for a dynamic marketplace that needs to experiment with different pricing and bundling strategies.”