"Best Cell Phone Deals, Get the most satisfaction and the least grief. Some 47,000 readers tell you how," Consumer Reports, January 2008

Like all years, Consumer Reports National Research Center conducts its Annual Survey of Cell-Phone Service. This year, the outfit found that "fewer than half of respondents were completely or very satisfied." It concludes that "makes cell service among the lower-rated services we survey, as it has been for the past six years." The authors then seem to be reading a lot of their own believes into the survey results, stating that carriers "pledged to prorate their hefty $150 to $200 early-termination fees and end their heavy-handed practice of mandatory contract extensions." While I am not disputing the fact that mobile carriers have started to prorate ETFs, I question the author’s use of adjectives such as "hefty" and "heavy-handed." The article goes on claiming that "it's not clear what actual costs such fees are intended to offset" and quotes two plaintiff class action laws on their views of ETF. Championing their claim, of course they say that carriers use ETFs to "hold its customers hostage." Interestingly, Consumer Reports did not include a quote from the defendants in this case and did not bother to state the obvious reasons for ETFs.

The economics of ETF are actually quite simple. The consumer gets a discount for a handset in return of his contractual promise to remain with the company for two years. If he breaks the deal, then he will be liable to pay liquidated damages – that at least some money to cover the lost revenue that the carrier incurs due to the early breach. Of course, if you ask (like Consumer Report did) whether a consumer who likely received a free or subsidized handset whether he likes ETF, he will say no! This is like conducting a survey on whether people prefer $5 or $10, everything else held equal. A more appropriate question to ask would have been whether consumers prefer handset subsidy with ETF over no handset subsidy and no ETF. Moreover, ETFs are used not only in mobile phone service contracts but also a number of other contracts. For instance, if one signs a lease contract on an apartment and breaches this lease, he will be responsible to pay the landlord a breach fee and/or seek a new tenant. There is nothing mysterious about ETFs – they assist consumers to obtain mobile phone service at a reduced entry cost in exchange of a promise to remain with the company for a period of time. If you don’t like it, then don’t sign it and instead opt for a non-term contract.