Cellphone breakups hard to do

For some cellphone users, it was the equivalent of receiving a get-out-of-jail-free card.

Last week, AT&T Wireless gave its customers the opportunity to drop their cellular service without incurring an early cancellation fee.

The reprieve, granted because AT&T is increasing charges, marked a significant coup for US consumers, many of whom issue complaints to the federal government each month about their inability to easily switch cellphone services. In most cases, their motive is to escape problems such as severe coverage gaps, billing errors, and inattentive customer service.

But rather than cancel immediately and face early-termination penalties, most customers decide to ride it out until their contract expires. Major cellular companies lose about 35 percent of their customers this way each year, according to the Boston-based market-research firm Yankee Group.

Still, many dissatisfied users would prefer not to serve out months as an indentured customer.

AT&T's decision to waive its $175 cancellation penalty through July 31 is the first sign of a loosening in policy toward customer contracts.

But do not expect such flexibility to last. Earlier this month, major carriers persuaded the Federal Communications Commission to forestall for the third time a rule that would let customers use the same cellphone number among different carriers.

Such delays, experts say, illustrate carriers' urgent need to hold on to customers amid a period of flagging sales and ebbing interest from investors. They will likely make it as difficult as possible for cellphone customer to switch services.

"It's gamesmanship," says Carl Hilliard, president of Wireless Consumers Alliance, a consumer advocacy group in Del Mar, Calif. "Buried in little fine print in service contracts is the fact that [customers] are locked in."

Currently, the nation's six major cellular providers charge about the same amount to cancel service. Cingular levies the lowest fee ($150) and Nextel and VoiceStream charge the highest ($200).

Each carrier grants a short trial period, from a few days to a month, for new users to test its service. After the trial period, however, the companies' cancellation fees apply until the contract expires.

While the federal regulators set no limits on what companies can charge for early termination, some government officials have acted when they believe fees are too high. Iowa's attorney general recently sued United States Cellular – a national carrier focusing on midsize cities – after customers complained about "break fees" as high as $300. The company agreed in May to limit the fee to $150.

Cancellation fees became standard industry practice in the mid-1980s. Back then, the cost of a cellphone was prohibitively high – about $800. As a result, the industry received permission from federal regulators to bundle the cost of the handset and service.

In addition, cellular companies began to subsidize the cost of handsets by $100 and more. "Phones have been devalued because carriers have had an ongoing policy of giving away phones for free," says Ken Hyers, an analyst with market-research firm In-Stat MDR, in Scottsdale, Ariz.

Because of the phone subsidy, experts estimate that companies do not profit from a customer until 10 months into the service contract. High early-termination fees were instituted to discourage customers from cancelling and to cover the cost of the phone in case they do.

Yet consumer advocates argue the fee is exorbitant, given that the cost of handsets has fallen considerably over the past five years.

Indeed, 70 percent of cellphone owners buy models that cost the carriers between $85 and $100 – about $75 less than carriers' cancellation fees, according to In-Stat MDR analyst Neil Strother.

Mr. Strother adds that the fee also helps cover the cost carriers pay to attract new customers – about $300: "If they lose you, it costs them a lot to get you back."

The free phones lure most consumers to accept carriers' strict contracts. Cingular, for example, offers a free Motorola 120T handset to those who sign a two-year contract and make a $20 donation to the Special Olympics. The same phone costs $180 on Motorola's website.

But heavily discounted phones can become useless when consumers switch carriers. Handsets are often designed to work only on specific carrier networks. Consumers are often surprised to find that their cellphone no longer works with a new carrier, experts say.

Even customers who use the same carrier in a different part of the country often must pay an "unlocking fee" to adjust their handset to work properly. The price is usually more than a new phone, says Mr. Hilliard.

To avoid paying a penalty, consumers who break a cellphone contract must cite special circumstances, such as military service. But consumers with mundane complaints report some success haggling. Keith Jaros persuaded Cingular to waive its cancellation fee after he experienced spotty reception at home. "Sometimes they're lenient, depending on what you say," says Mr. Jaros, a software salesman in Acton, Mass.

Six months into her contract, Lee Hieb placed 10 phone calls and wrote six letters before her cellphone company agreed to waive its $200 cancellation fee. "I had a pile of correspondence three inches thick," says the Yuma, Ariz., physician, who was prompted by consistent billing errors to switch services.

To avoid such hassles, consumers can bypass contracts altogether. Those who do must buy their phones separately – often a cost of $100 or more compared with the price under a standard plan. They must also pay for service month by month. Because the carrier has no guarantee that the user will stick with it long term, the plan costs a bit more. Customers without a contract can also buy a phone and prepay for a bucket of minutes per month at a similar price.

More cellphone users will likely choose to not sign contracts, experts say, when they are able to carry the same phone number from one carrier to another.

The FCC's decision to delay implementation of "number portability" until November 2003 came partly in response to carriers' complaints that the policy would cause them to lose customers.

Indeed, 52 percent of cellular users say number portability would make them more likely to switch carriers, according to a survey by In-Stat MDR

Most experts believe the portability policy will go into effect next year. At that point, they say, customers will gain greater flexibility, but face higher monthly bills. The FCC will let carriers tack a new fee at the bottom of customers' bills. "They're probably going to pass on fees in the neighborhood of between 50 cents and a buck," says Mr. Hyers.