Cellphone breakups hard to do
For some cellphone users, it was the equivalent of receiving a get-out-of-jail-free card.Skip to next paragraph
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Last week, AT&T Wireless gave its customers the opportunity to drop their cellular service without incurring an early cancellation fee.
The reprieve, granted because AT&T is increasing charges, marked a significant coup for US consumers, many of whom issue complaints to the federal government each month about their inability to easily switch cellphone services. In most cases, their motive is to escape problems such as severe coverage gaps, billing errors, and inattentive customer service.
But rather than cancel immediately and face early-termination penalties, most customers decide to ride it out until their contract expires. Major cellular companies lose about 35 percent of their customers this way each year, according to the Boston-based market-research firm Yankee Group.
Still, many dissatisfied users would prefer not to serve out months as an indentured customer.
AT&T's decision to waive its $175 cancellation penalty through July 31 is the first sign of a loosening in policy toward customer contracts.
But do not expect such flexibility to last. Earlier this month, major carriers persuaded the Federal Communications Commission to forestall for the third time a rule that would let customers use the same cellphone number among different carriers.
Such delays, experts say, illustrate carriers' urgent need to hold on to customers amid a period of flagging sales and ebbing interest from investors. They will likely make it as difficult as possible for cellphone customer to switch services.
"It's gamesmanship," says Carl Hilliard, president of Wireless Consumers Alliance, a consumer advocacy group in Del Mar, Calif. "Buried in little fine print in service contracts is the fact that [customers] are locked in."
Currently, the nation's six major cellular providers charge about the same amount to cancel service. Cingular levies the lowest fee ($150) and Nextel and VoiceStream charge the highest ($200).
Each carrier grants a short trial period, from a few days to a month, for new users to test its service. After the trial period, however, the companies' cancellation fees apply until the contract expires.
While the federal regulators set no limits on what companies can charge for early termination, some government officials have acted when they believe fees are too high. Iowa's attorney general recently sued United States Cellular a national carrier focusing on midsize cities after customers complained about "break fees" as high as $300. The company agreed in May to limit the fee to $150.
Cancellation fees became standard industry practice in the mid-1980s. Back then, the cost of a cellphone was prohibitively high about $800. As a result, the industry received permission from federal regulators to bundle the cost of the handset and service.
In addition, cellular companies began to subsidize the cost of handsets by $100 and more. "Phones have been devalued because carriers have had an ongoing policy of giving away phones for free," says Ken Hyers, an analyst with market-research firm In-Stat MDR, in Scottsdale, Ariz.
Because of the phone subsidy, experts estimate that companies do not profit from a customer until 10 months into the service contract. High early-termination fees were instituted to discourage customers from cancelling and to cover the cost of the phone in case they do.