Rep. Markey’s Wireless Investment Prohibition Act

by on March 4, 2008 · 6 comments

Congressman Ed Markey (D-Mass) has introduced legislation aimed at ridding the cell phone world of the much criticized practicies of phone subsidies, long-term contracts, and termination fees. In the name of contract “consistency” Markey’s bill mandates that cell companies offer alternative plans that contain no subsidy for the handset and plans that offer month-to-month service.

The bill contains a long section of “findings,” which are intended to point out what, from Rep. Markey’s perspective, are the illogical practices of cell phone providers. However, if you look at the issue of termination fees, you’ll find that Rep. Markey’s bill ignores the role of competition in decreasing costs to consumers and fails to take into account long-term investment in increasing nation-wide wireless capacity.

The bill claims that termination fees “Do not reflect the cost of recovering the monetary amount of a bundled mobile device or any other expenditure for customer acquisition.” The most glaring problem with this finding is that it’s already outed. Sprint, which is currently hemorrhaging money, instituted a new policy in November that allows customers to change plans without extending contracts and prorates termination fees. This came on the heels of similar announcements from Verizon and AT&T in October of last year. So, the bill’s $175 average termination fee figure is likely an incorrect one based on old policies.

But termination fees don’t just serve the purpose of cost recovery, they also provide an incentive for customers staying loyal to their wireless provider and giving these providers revenue predictability. With predictable revenues, it’s easier for cell phone network companies to get the financing they need to build the multi-billion dollar networks of tomorrow. Rep. Markey’s bill may save consumers in the short-term, but in the long run adding volatility to the marketplace will stem investment and slow the roll-out of 4G and Wi-Max networks.

We often talk about the unintended consequences of legislation in our work at CEI–this is a prime example of some very significant and costly unintended consequences that will ultimately hurt consumers and threatens to put America behind the curve on cell phone technology.

Rep. Markey’s bill also deals with wireless broadband, coverage maps, and spectrum efficiency. Topics that Ryan Radia and I will be addressing in future posts.

  • http://www2.blogger.com/profile/14380731108416527657 Steve R.

    Cord wrote: “But termination fees don’t just serve the purpose of cost recovery, they also provide an incentive for customers staying loyal to their wireless provider and giving these providers revenue predictability.”

    Seems to me that this logic is backward. Customer loyalty should be based on providing value to the customer and good customer service. If a company provides value and good customer service than the customers will stay loyal. The current practice with early termination fees is more akin to a hostage situation where you have to buy your “freedom”.

    The Sprint reference, is a really an example of a company changing its policies out of desperation when it is too late and not really a reflection of the wireless industry developing a warm fuzzy feeling for its “loyal” customers. We used to have Sprint, when I complained about their poor customer service, they essentially said “we don’t care”; so we left. Evidently other customers left too and Sprint is now paying the price for this arrogance. This is the free market at work.

    When telecommunication companies attempt to screw their customer with onerous business practices that are patently self-serving, the unattended consequence is legislation. If the telecommunication companies don’t want to be regulated, provide value to the customer so that they remain loyal. Customers are not revenue units nor a subsidy for your business. If you can’t compete in an open and free market you have no business being in business.

  • http://www2.blogger.com/profile/14380731108416527657 Steve R.

    Cord wrote: “But termination fees don’t just serve the purpose of cost recovery, they also provide an incentive for customers staying loyal to their wireless provider and giving these providers revenue predictability.”

    Seems to me that this logic is backward. Customer loyalty should be based on providing value to the customer and good customer service. If a company provides value and good customer service than the customers will stay loyal. The current practice with early termination fees is more akin to a hostage situation where you have to buy your “freedom”.

    The Sprint reference, is a really an example of a company changing its policies out of desperation when it is too late and not really a reflection of the wireless industry developing a warm fuzzy feeling for its “loyal” customers. We used to have Sprint, when I complained about their poor customer service, they essentially said “we don’t care”; so we left. Evidently other customers left too and Sprint is now paying the price for this arrogance. This is the free market at work.

    When telecommunication companies attempt to screw their customer with onerous business practices that are patently self-serving, the unattended consequence is legislation. If the telecommunication companies don’t want to be regulated, provide value to the customer so that they remain loyal. Customers are not revenue units nor a subsidy for your business. If you can’t compete in an open and free market you have no business being in business.

  • http://cordblomquist.com Cord Blomquist

    Open and free markets include contracts of all kinds, not just the contracts that Rep. Markey approves. What if we made termination fees illegal for all types of contracts? In your vision of a “free and open” market, people would feel free to come and go as they please without being saddled with long-term commitments of any kind.

    You want to move out of your apartment, feel free! Sure, your landlord won’t be able to get a loan to build a new apartment building to house other people or to replace your aging building, but that’s his problem, right?

    Cell phone service doesn’t fall from the sky, it’s built from the ground up through massive investments requiring billions of dollars be put on the line. If telcos can’t predict how many customers they’ll have in a month, let alone a year, we won’t see too many towers popping up to give us that next generation of service we’re looking forward to.

    You say that, “Customers are not revenue units nor a subsidy for your business.” No, they’re not a subsidy, but they are a business’s revenue stream. Like it or not, good will or good intentions don’t build nation-wide cell phone network or any other type of successful business. Instead, a business model that’s constructed around a long-term vision is what creates modern conveniences like our cell phone networks. By forcing cell phone companies to abandon long-term contracts, they must also give up some degree of long-term planning.

    I’m sure the same folks saying that no one ought to be obligated to a long-term commitment will be complaining that businesses can’t think long-term when we fall behind Europe and Asia in cellular connectivity.

  • http://www.cordblomquist.com cordblomquist

    Open and free markets include contracts of all kinds, not just the contracts that Rep. Markey approves. What if we made termination fees illegal for all types of contracts? In your vision of a “free and open” market, people would feel free to come and go as they please without being saddled with long-term commitments of any kind.

    You want to move out of your apartment, feel free! Sure, your landlord won’t be able to get a loan to build a new apartment building to house other people or to replace your aging building, but that’s his problem, right?

    Cell phone service doesn’t fall from the sky, it’s built from the ground up through massive investments requiring billions of dollars be put on the line. If telcos can’t predict how many customers they’ll have in a month, let alone a year, we won’t see too many towers popping up to give us that next generation of service we’re looking forward to.

    You say that, “Customers are not revenue units nor a subsidy for your business.” No, they’re not a subsidy, but they are a business’s revenue stream. Like it or not, good will or good intentions don’t build nation-wide cell phone network or any other type of successful business. Instead, a business model that’s constructed around a long-term vision is what creates modern conveniences like our cell phone networks. By forcing cell phone companies to abandon long-term contracts, they must also give up some degree of long-term planning.

    I’m sure the same folks saying that no one ought to be obligated to a long-term commitment will be complaining that businesses can’t think long-term when we fall behind Europe and Asia in cellular connectivity.

  • tiff

    did he actually introduce it yet? i thought it was just draft legislation at this point.

  • tiff

    did he actually introduce it yet? i thought it was just draft legislation at this point.

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