AT&T Imposes Inexplicable Early Termination Penalty on iPhone Users Posted by Bob at 07/05/07 11:49 AM

All those sleek new iPhones that have been flying off the shelves at $600 a pop have a built-in feature that isn't being touted by Apple or network provider AT&T -- an inexplicable early termination penalty of $175.

Wireless phone carriers have imposed such penalties for years, arguing that they are necessary to help make up for lost revenues from discounted or free phones they use to coax customers into signing long term contracts.

But Apple and AT&T are not offering any sort of discount on the highly-coveted iPhones, which went on sale last Friday. Customers were actually camping out in line just to buy one.

Which brings us to the other -- and probably more important -- reason wireless carriers impose early terminiation penalties on their customers. It's because long term contracts with early termination penalties are devastatingly effective in keeping customers from switching carriers.

In our annual cell phone survey, Consumers Union found that nearly half of all cell phone customers who were considering switching carriers were deterred from doing so by the early termination penalty. That effectively means wireless phone companies don't have to offer superior networks or service to keep their customers loyal; the penalties do the work for them.

But AT&T can't use even that infuriating, "forced loyalty" excuse to justify its early termination penalty for iPhones. iPhone customers have no other choice except a two-year service contract with AT&T.

Were they to have a choice, AT&T probably should be worried about customers fleeing in droves based on the early reports about how its Edge Network for iPhones is working. The network crashed in many parts of the country last weekend, although AT&T says it had nothing to do with iPhones. Further, many iPhone customers are extremely unhappy with the speed of the network, which in many cases is slower for web surfing than dial-up Internet services.

Columbia University Professor Tim Wu, who coined the term "network neutrality" a few years ago, has written an excellent article on the odd and anti-consumer decision by Apple to hitch the iPhone to AT&T exclusively, which you can read by clicking here. He makes a comparison with the computer business.

"Imagine buying a Dell that worked only with Comcast Internet access or a VCR that worked only with NBC," writes Wu.

He says the iPhone will not be able to fulfill its hype about being "revolutionary" so long as it remains tethered to AT&T's network exclusively.

"If Apple wanted to be revolutionary, it would sell an unlocked version of the iPhone that, like a computer, you could bring to the carrier of your choice. An even more radical device would be the 'X Phone'—a phone on permanent roam that chose whatever network was providing the best service. Imagine, for example, using your iPhone to talk on Sprint because it had the best voice coverage in Alaska, while at the same time using Verizon's 3G network for Internet access. Of course, getting that phone to market would be difficult, and Apple hasn't tried."

In the short term, we are hopeful that Apple with dump its exclusive deal with AT&T for network service. In the longer term, we would love to see Apple and other forward-looking telecom companies come to market with the X-Phone type devices described by Professor Wu, which can pick and choose the best network based on the circumstances.

At an absolute minimum, customers and policymakers should demand that AT&T immediately drop its unwarrented and anti-consumer early termination penalty for iPhone service.

comments (16)

1 Posted by Beverly Kurtin at 07/05/07 01:21 PM

A few months ago I purchased an air card from what was then Cingular. It failed to meet my expectations in that it was slower than dial up! I returned it and was hit with 2 month's service charge plus an additional $200 discontinue penalty. I'm in the process of having my attorney handle this. I went to Verizon and was blown away, it had real broadband speed. In contrast to the way I was treated with Cingular, when I bought a new computer that used a different width for the PCMCIA card, Verizon cheerfully exchanged it and even installed it for me with no hassle.

I'd been mislead into thinking that if a product didn't work correctly it should be returnable with no charge. Tell that to AT&T. While behind the scenes they are forcing older, higher paid employees with years of time in service, they are hiring new people off the street and still using offshore contract employees.

In my particular case, I have informed AT&T to sue me if they want the money. I live on Social Security and am disabled. I've also informed them not to call me again. They put out a defective product and then want to screw their former customers. Imagine that.

My legal advice is pre-paid, thank goodness for that!

2 Posted by L.Levitt at 07/05/07 01:47 PM

Despite its highhandedness, I have been reminded that AT & T is the only unionized company in this field, therefore a reason to go with them rather than with one of the others. I have no way to verify the truth of this contention; can anyone confirm or deny it factually?

3 Posted by David at 07/05/07 02:15 PM

I agree totally. I have a family plan with AT&T with 5 phones. Every time I get close to being out from under my contract agreement someone breaks or looses a phone. Pay retail for a replacement phone or sign up for another two years. To switch carriers I would have to pay (175 x 5) $875.00 if all the phones were under contract. Considering I have been paying around 200.00 a month for a couple of years now I would believe they made their money back a long time ago. It’s not just AT&T. All the cell phone carriers are greedy. I don’t see that changing any time soon.

4 Posted by Conrad W Ware at 07/05/07 02:48 PM

This day and age, everything is all about MONEY. Big business does not hesitate to shaft their customers.

5 Posted by Apex Carlie at 07/05/07 04:24 PM

To David wi9th the family plan. You can buy insurance against the loss or breakage of your cell phones. Cheaper than paying the termination fee. Secondly, if you are neqring the end of your contract and you have a lost or busted phone, you can contnue paying for the family plan even though one of the phones is not available. The coswt to add the fifth phone on a family plan is not very much. You have to balance the differfence between paying the peanalty and paying for one line that will not be used.

6 Posted by Carlton Perry at 07/05/07 05:00 PM

All those young adults who, unable to resist the latest fad, will be switching before the end of contract. For older, more seasoned adults, the $175 drop fee sounds prohibitive. For kids it is just another charge on their, or their parents, credit card.

7 Posted by Joe at 07/05/07 05:45 PM

Nothing negative about AT&T surprises me. I got their DSL about five months ago that had a "special" number to call for assistance. Nothing special about it. You won't get the opportunity to speak to a real person (usually offshore and hardly understandable)until you've listened to a multitude of automated questions and replied to each. When you finally do get that real person on the line, be hopeful they have the answer and don't have to transfer you someone else more automated questions and answers.

8 Posted by Carly at 07/05/07 07:19 PM

Reference David who comments he has a $200 monthly phone bill and constantly lost or broken phones. Ebay has all the phones you need and you can activate them, just as I did with my daughter's, on-line. Assuming the other phones on your contract are for family members, do kids really need picture capability, text messaging and music?

9 Posted by Steve at 07/05/07 07:59 PM

While the iPhone is appealing, I'll resist until other carriers are available (if at all). Last Christmas I broke down and bought a Trac-Phone (sp?) for my wife that we use very sparingly (we don't give our number out either). I don't like unknowable monthly charges, termination fees, roaming charges, etc., etc. Less is more but I certainly understand those who really need a cell phone, it can be indespensible.

AT&T's (really the old Singular) termination fees are absurd. That's why strong consumer protection laws are needed.

10 Posted by Edward Ojeda at 07/06/07 06:02 PM

We wanted to get out of a contract with Verizon because my phone was broke and I wanted to buy a new one. I had to pay $350 for the phone because it was too early to renew. Breaking the contract and paying the termination fee brought the phone to the same price if I signed up for another two years. One feels as though there is no choice. Consumer beware!

11 Posted by Matthew Treder at 07/07/07 02:52 AM

It's blatantly clear that when it comes to service and contracts, phone carriers have no class. For those who would consider stooping to their level, Wired offers eight ways to ditch the contract, complete with your odds of success (and lighthearted evaluation of the ethical implications).

http://www.wired.com/gadgets/wireless/news/2007/06/iphone_howto

12 Posted by Matthew Treder at 07/07/07 03:48 AM

Another helpful site for the contractually obliged:

http://www.wikihow.com/Get-out-of-a-Cellular-Service-Contract

13 Posted by gp at 07/12/07 11:14 AM

i dislike having to commit to two years to get service.cant we encourage CR to spread the word or organize a revolt against this practice. we went from free phones and no or little commitment to $300 phones etc

14 Posted by mizerello at 07/17/07 01:18 PM

If you are even considering switching to AT&T so you can get iPhone, buyer beware! AT&T's customer service is horrible! I recently tried to cancel my long distance service and have been held hostage by this company. You're calls are routed to a call center in India where you are then treated to conversations with people who are holding script cards and who don't understand or, have been told to make it impossible for customers to cancel their service. I've been hung up on several times and, have for 3 months now been trying, unsuccessfully to cancel my long distance service. I would never use any service offered by AT&T, if they were the last phone company available. Sign up with them at your peril!

15 Posted by Jeremy at 07/24/07 11:32 PM

Has anyone tried http://www.cellswapper.com ? It helps people get out of their cell phone contracts by matching them up with other people who are looking for a short term contract.

16 Posted by Paul at 08/03/07 04:29 PM

Dude, AT&T's union or non-union status is a terrible reason to decide whether to give your business to them. This is an "At Will" market. Do good work or get used to standing in the unemployment line. It cost employers $$$ to fire someone but they have to weigh the cost to the benefit of getting rid of an undesirable worker. The same goes for who ever you decide to do business with. Everytime I've called Sprint to discuss a problem that does not get resolved at the first attempt, my next call is to notify them that I am firing them as my wireless provider and that I am prepared to eat the cost associated with my decision. When this happens, somehow I get transferred to an Amercian speaking, technically competent rep that solves problems, reworks my plan, waives fees, and puts any agreements all in an email that I can reference for future purposes.