We, the customers of the United States of America, are getting screwed on our wireless telephone bills.
How? The practice known as "subsidization." This is how cell phone stores can offer you a "free" telephone and still make a profit on you as a customer. Obviously, the phone isn't really free. But you still walk out of the store without having spent any money that day.
How does this work? It's really very simple: When you sign a cellular service contract, you agree to pay x number of dollars for a period of time - usually 1 or 2 years. In exchange for this agreement, the wireless carrier agrees to extend you credit to cover the cost of the cell phone. The amount of the credit varies, but it's usually around $100 for one year and $200 for 2 years. That credit is what pays for your phone. If you cancel your contract early, the carrier charges you an Early Termination Fee, or ETF of anywhere from $150 to $360. The justification is that the ETF recoups the credit they extended to you when you initially purchased your phone.
Let's use the iPhone as an example. The top of the line iPhone is around $300 with a new contract or $700 "retail". That means AT&T and Apple are giving you $400 in credit to sign up with AT&T and buy an iPhone. After 2 years, the phone is paid off, and AT&T starts making an extra profit of $17 a month from your account. It seems to me that once your phone is paid off, you should have the right to receive a discount on your bill - a discount that's equal to the monthly amount that was going to pay off your subsidy in the first place. If you keep your phone for 3 years, you're being cheated out of $100 that's rightfully yours.
In fact, if you walked in to an AT&T office and said "I already have a phone, would you please turn it on?" you'd still be forced to sign a 1 or 2 year contract - at the same price as subsidized users. How is it fair to this guy to pay the entire cost of the phone up front and still get dinged for the ETF if he only needs a contract for a short term.
I propose a change:
I propose that wireless carriers be forced to acknowledge that they are, indeed providing consumer credit and follow the same rules that a bank would have to follow in subsidizing cell phone purchases. Once a contract
When a customer buys a phone at full retail price, he should not be forced to sign a contract of any length. He should pay month by month and cancel at any time with no fees or termination charges.
When a customer receives a subsidy on a new phone, the subsidy amount should be enumerated on the contract. The monthly repayment amount of that subsidy should also be listed on the contract. That amount should be listed on the customer's phone bill as a separate line item, independent of the monthly wireless access and airtime fees. The customer's remaining subsidy balance should also be listed on the bill.
When the subsidy balance reaches zero, the subsidy charge should be removed from the customer's bill.
The customer should have the option to pay off his subsidy at any time, and the amount should only be the current balance, based on what the customer has already paid.
A reasonable interest rate can be added to this subsidy, since it really is a loan, but the rate should not exceed that of a normal consumer credit purchase.
A customer can cancel his account at any time, with or without cause. If the customer has an unpaid subsidy balance, he will only pay the unpaid balance.
A carrier may not reject any potential customer as a bad risk if that customer is willing to pay a month's worth of service up front and can pay the full, unsubsidized price for his handset.
A system like this is fair to consumers and to carriers. It formalizes the Credit Relationship that's established when you get a subsidy on your phone. It also allows customers to choose how to pay for their phone: save some long-term cash by paying up front, or take the credit and get out of the store for less money. It also saves a nasty surprise if a customer's financial situation changes a year down the road... he sees the subsidy balance on each month's bill, and he can choose to pay it off at any time.