Yesterday, we heard that a California Supreme Court judge has ruled that early-termination fees on cell phone contracts are illegal. This is HUGE. Contracts and early-termination fees basically define the cell phone industry in the United States. Could we be headed for a major change if this decision holds?
By locking consumers into 1 to 2-year contracts with an early-termination fee tacked on, carriers are able to guarantee a certain amount of revenue from their subscribers. By doing this, they are able to offer subsidies on the actual hardware. This is why the iPhone 3G is only $199, but requires a 2-year contract.
This is completely different from Europe and other markets where consumers pay full price for their hardware, but are not forced to sign any contracts.
There will be appeals by the cell carriers, but if this holds, what could happen?
Early termination fees put the power in the hands of the carrier. How many times have you heard a friend say they would love to get a new phone or switch carriers only to shoot down their idea because they are under contract for another year? In some cases, it could even be cheaper to pay for two contracts instead of paying the early termination fee on one.
So, let's assume this decision holds, and carriers aren't legally allowed to charge these fees, we'll probably either see the carriers attempt to work around the legal problems through a loophole or the abolition of cell phone contracts. Hooray! Except, cheap handsets are the first thing to follow contracts out the door.
Most people don't realize that cell phones are actually fairly expensive pieces of hardware after years and years of discounted, subsidized prices. In the end, it's hard to say if the consumer will save money out of contract, but with a full-priced device. It'll depend on the plans, which could increase in price in response.
So if we might not actually save any money, what will be gained by this decision? Freedom.
Some cell phone carriers are notorious for poor customer service because they probably don't feel like going out of their way to help their customers when they have them locked into a contract. Without contracts, a greater responsibility to appease and provide for the customer falls on the carriers.
Suddenly, threats to cancel service and move to a competitor could have meaning. Carriers would have to fight to keep you as a customer.
Pair this up with the trend of moving toward open networks that must accept any device and you've got the making of a European style cell phone market.
That is, of course, if the carriers don't just find a loophole. You can be sure their best lawyers are on the case.
On the hardware side, most phones would end up being sold unlocked. We wouldn't be surprised if the retail market for devices moves online or into big box retailers, while the service is sold by carriers. Sure, they'd sell phones too, but suddenly a whole new market complete with competition could open for unlocked handsets.
If you were suddenly able to break your contract without consequence, would you switch carriers? Are you patiently waiting for your contract to end so you can get a new phone or upgrade?