Want to bail on your AT&T smartphone contract to switch to Verizon? It’ll cost you a lot more starting soon, the WSJ reports.
Starting June 1, ahead of Apple’s new iPhone launch, AT&T will raise its “early termination fee,” or ETF, to $325 on new and renewing smartphone contracts. That’s up 86% from its current $175 fee. For “dumbphone” contracts, the ETF will decrease by $25 to $150.
While this is likely to anger consumers, it’s mostly just a reflection of the economics of the mobile industry. (Verizon’s is $350.)
Early termination fees exist because carriers highly subsidise phones — easily by $325 in some cases — in order to get people to buy them and pay thousands of dollars in service fees over the length of a 2-year contract.
For example, AT&T subsidizes Apple’s iPhone by $300-$400 because iPhone subscribers will spend close to $100 per month for service over 24 months; that $400 investment generates more than $2,000 in service revenue.
Meanwhile, the trend in the industry is that smartphones are getting smarter and more expensive for AT&T to obtain, but the carrier also has to keep reducing the subsidized prices to compete with rival carriers for subscribers. Therefore, higher ETFs. (Except for dumber phones, which are getting cheaper to make; thus a lower ETF.)
How can AT&T do this credibly? By progressively reducing the ETF as consumers ride out their contracts, which it is sort-of doing already. But right now, it’s only reducing the ETF by $10 per month of paid service. This must be raised to $14 per month — 1/24 of $325 — for AT&T to maintain credibility.