Pricing goods and services that are rapidly becoming commoditized presents a challenge to sellers. How to differentiate your product vis a vis competitors? Often this involves bundling, but can take on many different forms of price differentiation schemes enforceable by contract law. Most people, including most regulators, have no clue about how hard it is to price a product and get it right. The California Public Utilities Commission ruled last week that Cingular’s pricing decision was wrong, not as a matter of market preference, but as matter of law. It imposed a $12.14M fine on Cingular for unfairly slapping customers with “early termination” fees. Here’s a Washington Post article on it.
These termination fees are actually quite consumer friendly. They are the customer’s acknowledgement of the fact that a large portion of a carrier’s costs are upfront at the beginning of the contractual relationship. The “free phone,” setting up the user’s billing account, assigning the phone number – a mobile carrier could charge for each individually, then we’d hear the consumer complaints! Otherwise, it’s a reasonable bargain for a consumer to limit his or her freedom for a year or two in exchange for the benefits of a bundled product arrangement.
I myself did the same thing with my DirectTV, agreeing for a one year contract in exchange for a “free” 3 room installation. Consumers also limit their freedom based on the kinds of handsets that each carrier supports – it’s another way that a consumer gets a phone at a reduced price in exchange for a contractual or technological limitation.
But what if there is some type of fraud or lack of disclosure involved? The PUC asserts that Cingular failed to disclose known capacity and coverage problems. Consumers who experienced coverage problems were not allowed to terminate their service without paying a fee. But there was no finding of fraud in this case. If anything, Cingular was guilty of optimism in the building of its network capacity. A Cingular media statement said that during 2000 to May 2002–the timeframe of the CPUC investigation–$1.6 billion was invested to improve and expand the California. Let’s remember that this was a period of rapid adoption of wireless by consumers and increased competition, resulting in decreased prices and increases in minutes, no long distance charges, etc. Overselling happens in many industries but reputation and customer service issues come back to haunt sellers (especially sellers of one-time events like concerts, but even then reputation scars bite back at promoters).
The Telecommunications Bill of Rights was adopted by the California PUC earlier this year. The “bill of rights” requires all telecommunications companies to adhere to rules regarding service quality, customer privacy, accurate billing, long-term contracts and fair marketing practices. But regarding this Cingular action, Commissioner Susan Kennedy states that “We are punishing behavior that was not against any particular rule at the time. I’m troubled that we chose to single out one company for punishment.”
While the PUC believes it is helping consumers, it’s pushing a “one size fits all” approach that is ill-suited for a dynamic marketplace that needs to experiment with different pricing and bundling strategies. The marketplace isn’t perfect–and indeed is one of caveat emptor – but let’s not forget the costs of government intervention, where there is no such thing as “early termination” for laws and regulation.