Regulating Early Termination Fees?

A few days ago, FCC Chairman Kevin J. Martin announced he wants to hold a hearing on early termination fees (ETFs) before deciding if and how to regulate ETFs. Chairman Martin did not limit his review of ETFs to wireless but suggested to also review ETFs charged by other platform providers, such as cable and wireline. Given the fact that the FCC has repeatedly found the U.S. wireless industry “effectively competitive,” this should be a rather short hearing for wireless ETFs. Similarly, the FCC and state regulators have found evidence of increased competition in the wireline market, granting reclassification and forbearance requests, making such hearing equally doubtful for wireline.  While the details of this hearing are not clear yet, it must entail a rigorous economic analysis. The FCC must first determine the level of competition in the relevant economic markets. If it finds the market to be competitive (as it did for wireless), then there is hardly any justification for regulatory intervention. The FCC might also review the amount of ETFs charged and access whether such amount is commensurate to the economic harm caused to the service provider by the consumer’s breach of contract. For instance, a wireless consumer with an average monthly recurring charge of $50 who terminates four months early inflicts an economic harm to his service provider of approximately $200. Actually, it is a little less as the service provider also avoids some costs due to the early termination and hence the total profit lost is somewhat smaller than $200. Assume the avoided cost is 20 percent. In this case, the carrier loses $180 due to early termination. In this example the consumer is better off breaching as he weighs off $200 with the ETF (typically $150). Second, the economic harm to the carrier is larger than the ETF charged to the consumer. Hence, the net economic damage is negative $30. Common sense would indicate that consumers only pay the ETF if the sum of the remaining monthly recurring charges is larger than the ETF. Since the economic harm to the carrier is close to the sum of the monthly recurring charges, it must be the case that ETFs do in many cases not harm consumers. Rather, they are a relatively cheap way out of a contract that the consumer voluntarily signed. I do hope that the FCC takes these and other economic aspects of ETFs into account before deciding on intervening in these markets.