Markey Bill on Early Termination Fees

Only a few days after the U.S. Federal Communications Commission (FCC) has found (once more) that the U.S. wireless marketplace is “effectively competitive,” Rep. Ed Markey (D-Mass) introduced draft legislation calling for the FCC to intervene in this competitive market place and to introduce rules regarding, among others, early termination fees (ETFs). Specifically, the bill calls for:

1.      Disclosure to consumers about rate plans in a “clear, plain and conspicuous manner.”

2.      Disclosure to consumers of ETF amount and the terms and conditions under which ETFs are incurred.

3.      Detailed maps of a carrier’s network coverage areas, including signal strength, and statistics on dropped calls.

4.      A cooling period of 30 days during which a subscriber can cancel his contract without incurring an ETF.

5.      Prorating any fees associated with leaving a contract early.

6.      Offering consumers “the opportunity to purchase subsidy-free wireless customer equipment.”

Without going in to the details of this bill, any effort to intervene in a competitive market must be approached with utmost care. Regulatory intervention in competitive market places is superfluous at best, and can cause serious harm to a well functioning market. Furthermore, some of the bill’s demands are unsupported or even incorrect while others come at significant costs. For instance, similar to the requirements in parts of Europe, the bill demands that carriers make available for purchase, subsidy free phones. These phones purportedly carry a higher price tag (as they are subsidy free) and in return do not require a term contract. The bill does not specify whether these handsets will need to be unlocked, although chances are that they will need to be offered in their “naked” version which means no contracts and no network locks. It is unclear why such measure would improve competition and consumer welfare. First, a number of carriers do already offer non contract handsets, albeit not for every model they carry. Second, why force carriers to offer naked handsets when consumers can either ask the carrier to unlock their handset or have their handset unlocked by a third party vendor?

Similarly, as I explained in my blog of February 12, ETFs are a relatively cheap way out of a contract that the consumer voluntarily signed. At $150-$200, ETFs are much lower than the average harm caused to a wireless carrier by a subscriber’s contract breach. If ETFs were set at levels that would, on average, make carriers whole, ETFs would need to be significantly higher – around $600-$800. Only then would it make sense to prorate. The Markey bill asks to prorate ETFs, even though it never established that the current amount warrants prorating. Finally, requiring detailed maps of network coverage comes at non-insignificant costs – costs which in a competitive market will be passed on to consumers in terms of higher prices. Additionally, requiring a 30 day cooling period (which a number of U.S. states already require) should suffice to determine whether a phone works where required. Hence, the detailed maps called for in the Markey bills stand to increase prices to consumers while offering no real benefit.