Washington, 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 entire industry.
CEI is a non-profit, non-partisan public policy group dedicated to the principles of free enterprise and limited government. For more information about CEI, please visit our website at www.cei.org.