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A $350 early-termination fee for smart phones? Now that smarts

Before you go shopping for a nifty new smart phone this holiday season, keep this in mind: Verizon Wireless, the largest provider of mobile-phone services, has just doubled its early-termination fee for high-end handsets if you decide you’d rather go with a different carrier.

It was bad enough when the company would slap you with a $175 charge for jumping ship after a 30-day trial period. Now that penalty is $350.

The in-your-face fee applies to BlackBerrys, the much-touted new Droid phones and other smart phones capable of sending and receiving text messages and e-mails as well as accessing the Internet.

“We increased the early-termination fee for advanced devices to reflect the higher costs associated with offering those particular devices to consumers at attractive prices and investing in our network to support these devices,” said Ken Muche, a spokesman for Verizon Wireless. “These costs are higher because advanced devices require more complex chip sets, microprocessors and licensed software that perform more functions than other phones.”

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But consumer advocates and some customers say that sky-high early-termination fees are little more than a way to hold people hostage.

“That’s a big hit,” said Denise Netzley, 46, who hadn’t been aware of the $350 fee as she shopped this week for a new smart phone at a Verizon Wireless store in West Los Angeles. She said something like this should be clearly posted in the showroom.

“I’d rather they be straight -- here’s the cost of the phone, here’s the cost of the service, here’s the early-termination fee,” Netzley said.

Wireless companies say they do play it straight, and that they offer customers plenty of choices. But those choices aren’t always clear, or particularly beneficial for anyone but the wireless company.

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Muche said Verizon smart-phone customers can choose not to have a two-year contract, and can instead pick a one-year plan or pay on a month-to-month basis.

But if you do opt for month-to-month payments, you’ll have to pay the full price for your smart phone, and that’s typically a whole lot more than the price included with a contract.

A fancy-schmancy, Google-powered Droid phone, for example, will run you $299.99 with a two-year contract from Verizon. The price jumps to $369.99 with a one-year contract.

If you skip the contract, that Droid will cost $559.99, not including monthly service charges beginning at $39.99.

Muche said the company makes this distinction clear to consumers. But when I visited Verizon’s website and checked out the smart phones available, the default pricing for the Droid was $299.99, accompanied by a two-year contract (and a $100 discount for shopping online).

The only way I would have known that I could go with a one-year contract or pay month to month was if I’d noticed a small box at the top of the page that changes the price settings, or if I clicked through to another page containing more info about each phone. Had I proceeded straight to checkout, I wouldn’t have been offered another chance to get anything other than a two-year contract.

At the Verizon store in West L.A., I had to ask a salesperson whether anything other than a two-year contract was available. I also had to ask about the early-termination fee.

Steve Jelesijevic, the store’s manager, said that if I’d bought a smart phone, his salespeople would have brought up the early-termination feeat some point. He said customers typically find the $350 hit “a shocking amount.”

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“We haven’t lost a deal because of it,” Jelesijevic said, “but people are really surprised.”

While Verizon’s $350 fee sets a new high-water mark for such penalties, it’s in keeping with the industry practice of offering totally cool handsets at reduced prices in return for customers’ agreeing to commit to long-term contracts.

AT&T, for example, will smack you with a $175 fee if you exit your iPhone contract before two years are up. (The fee decreases by $5 for every month you have the phone.)

I understand what phone companies say about trying to recoup the cost of subsidizing customers’ handsets. The question is whether this arrangement favors service providers more than consumers.

“This isn’t about subsidies,” said Joel Kelsey, telecom policy analyst for Consumers Union. “It’s about punishing people for leaving the provider.”

He noted that Verizon will lower its early-termination fee by $10 a month for each month you’re with the company. But even if you stayed for the full two years, your early-termination fee would still be $110.

“If this was really a subsidy, that fee should be zero by the end of the contract,” Kelsey said. “This shows that the early-termination fees they’re charging don’t actually reflect the cost of the discounted phone.”

Moreover, he pointed out that even if you did buy your phone separately -- I found a Droid on Amazon.com for $529.99 -- you’d still be paying the same amount for a Verizon service plan as someone with a subsidized phone.

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“Shouldn’t you be paying less, considering that they didn’t subsidize your phone?” Kelsey asked.

To me, this is the key point -- and the best way to introduce some much-needed transparency to the wireless market.

The way things work now, consumers have a very tough time knowing the actual cost of products and services they get from telecom companies.

Phone manufacturers and service providers enter into sweetheart deals, and the pricing gets all muddled amid long-term contracts, fees and special discounts.

The first way to untangle this would be to end wireless exclusivity. All phones should work on all compatible networks -- particularly in light of the fact that all wireless companies are building state-of-the-art networks to accommodate increasingly snazzy smart phones.

Figure it like this: If you buy a TV at Best Buy, it’ll work with any cable or satellite provider you pick, anywhere in the country. Mobile phones should work the exact same way.

And something tells me this would prompt cellphone makers such as Motorola and Nokia to compete more aggressively on features and pricing.

Meanwhile, let’s end this practice of service providers “subsidizing” a product they don’t even make. If there’s anything that service providers should be discounting, it’s service.

So if a company such as Verizon or AT&T wants to lock you into a two-year contract -- and why wouldn’t it? -- let it offer wireless service at a lower cost than if you chose to pay month to month.

A reasonable early-termination fee could be charged if you leave early, to reflect your not keeping your end of the bargain. That’s only fair.

As with handsets, it’s hard not to think that service providers would end up competing more aggressively on price and on wireless speeds and coverage areas.

This was the whole point of deregulating the telecom market in 1996 -- boosting competition among service providers. But all it’s done is make the market murkier, as Verizon’s $350 fee illustrates.

Time to let in a little sunshine.

David Lazarus’ column runs Wednesdays and Sundays. Send your tips or feedback to david.lazarus@latimes.com.


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