$350 Is the New $175

This week brings the latest in back-and-forth letters between the FCC and the wireless industry. We've written about this before – e.g., here, here, here and here.

In this round: The wireless industry is greedy and charging too much; the FCC sends them a polite letter asking why; and the carriers' response fails to provide any meaningful information. Sound familiar? The industry's current round of responses tells the same story as before, in mostly the same words.

The carriers fill their answers with rhetoric about recovering customer acquisition costs and other such things. But many carriers offer the same plan terms with or without a contract. The result, in practice, is that there's only one difference between a contract plan and a month-to-month plan, only one reason why consumers would choose a contract, and thus only one potential justification for an early termination fee (or ETF): a cheaper phone.

Subsidies can be good, in theory. Consumers get a cheap(-ish) device, and the carrier gets a two-year contract. But in practice, they've always been an uneven trade.

There's no meaning or reality to the "full retail" price of the phone. It reflects no competition (both because phones are often exclusive, and because most consumers choose the subsidized option), so it's artificially high and not related to the wholesale price paid by the carrier. The result is that the "discount" seems far more generous than it actually is, and fails to reflect the actual cost differential. This dynamic has produced universally high ETFs, leaving consumers without any better options.

And now the carriers are getting greedier — $350 is the new $175. With estimates of bill-of-materials and manufacturing costs under $200 for even the newest phones, and with "subsidized" prices that are also around $200, that $350 fee starts to look like awfully inflated. Remember the lesson from Ayyad v. Sprint: ETF amounts are calculated not based on the business measures of loss and recovery, but based solely on their ability to reduce churn.

Nowhere in the industry's letters to the FCC will you find an admission that the ETFs represent gross overpayments for the "subsidy" provided for the device. Nowhere will you find an explanation for why the monthly bill price is the same whether you get a subsidized device or not, or why your bill doesn't get cheaper when you're no longer "paying off" the device. Although the carriers can plead the Fifth Amendment defense and not be held guilty for silence, their lack of meaningful answers should drive the FCC and Congress toward deeper inquiry, if not real policy reform.

Without more consumer-friendly and competition-friendly practices, the wireless industry will shift more and more toward consolidation and reduced choice and innovation. But with a few simple reforms, the FCC could create a market where carriers have incentives to invest in service quality, and where meaningful competitive pressure reduces service price. Wireless services are becoming an essential component of the Internet and media infrastructure. Already, iPhone users can record and livestream video from their phones. Now, if only they had a network that didn't suck and if they weren't paying through the nose for service, we'd be in great shape.

So we're going to keep pushing on the FCC and Congress to go beyond letter writing, to demand better answers, and to apply the stick to back it up. And you can help. Take action now!

People + Policy

= Positive Change for the Public Good

people + policy = Positive Change for the Public Good