Friday, May 21, 2010

What's wrong with cell phone contracts

AT&T announced today their plans to significantly raise their early termination fees (ETF) on smart phones. Of course, this is messed up! Now they claim that they have these fees to recoup the cost they incur by subsidizing the cost of the phone to make them more affordable for consumers. The truth, of course, is that they're just money hungry and they prey on our insatiable need for the latest gadget. I don't begrudge them their right to make money but customers are supposed to come first.

There are two simple options the cell phone companies could employ to make the ETF more reasonable and fair to consumers.

Option 1

This option involves a bit of calculation. The cost of the subsidy plus a reasonable profit margin (10%) = the ETF. Furthermore, the ETF is then divided by the term of the contract and for each month completed, that amount is subtracted.

Here's an example
AT&T's Cost to Apple$500
Phone's cost to Consmuer$200
Subsidy paid by AT&T$300
Reasonable Profit$50
Total Subsidy/ETF$350
Amount deducted each month of a 24 month contract$14.58

So, let's say you complete 9 months of your contract and you've had enough. Your early termination fee would be $218.75

Option 2

This option is really an extension of the firstTake the phone back. AT&T can refurbish and resell that same phone for $150. It costs maybe $50 on average to refurb the phone. So, give the consumer a $50 credit for the phone, which comes off the top of the ETF. Additionally, the phone company gets to make another $50 on the phone.

This isn't rocket science.


  1. Or how about just stop the subsidies and sell the phones for what they really cost.

  2. Generally, that is an option, unless you want an iPhone. Most manufactures let you buy unlocked phones directly from them. But who wants to pay $500+ for a cell phone?

    Oh, wait, I didn't address your comment - "what they really cost." I believe in a business' right to make a profit but this industry is obviously one where the markup is extraordinary.