Thursday, December 10, 2009

Fairly Disclosing ETFs vs. Price Regulating ETFs

The competitive free market is the best price-setting mechanism for wireless device and service contracts that include early termination fees (ETFs). So I maintained in my recent FSF Perspectives piece, “Let Competition and Choice Check Wireless ETFs.” In the dynamic wireless marketplace, the case for pricing freedom for wireless carriers and competitive choice for consumers is especially strong. Currently, all major wireless carriers make subsidized wireless device and service contract ETFs optional for consumers, with fee amounts pro-rated to some degree or other over the life of the contract. ETFs therefore present consumers with an added price option that makes wireless devices and services more affordable.

Arguments for marketplace regulation are often made in one or more of three circumstances. These include: (1) where transactions between producers and consumers impose external costs on third parties; (2) where monopolization or lack of existing or potential competition unduly limit consumer choices; and/or (3) where informational asymmetry exists between producers and consumers concerning technical or complex knowledge about a product or service.

To the best of my knowledge, no ETF-critics suggest that such fees impose any sort of spillover costs on non-parties to wireless device and service contracts that feature ETFs. And as I point to in my FSF Perspectives piece, several studies and analyses—including one by the FCC from earlier this year—reveal a dynamic wireless marketplace. Contrary to claims that wireless ETFs are anticompetitive (also addressed in my FSF Perspectives piece), existing marketplace competition tips overwhelmingly against regulation and in favor of pricing freedom and competitive choice.

It’s also a long shot to peg ETFs as presenting any kind of information asymmetries. By nature, ETFs are usually simple terms of service and not especially difficult to understand, they don’t (or shouldn’t) typically necessitate consumers to undertake any extraneous efforts to gather information about them in order to accurately appraise them. Nor must consumers necessarily possess prior or subsequent experience with ETFs in order to be able to make an informed choice about a wireless carrier’s ETF terms.

To date ETFs have primarily presented issues of fair disclosure and informed consent. Those issues have been raised in a string of class-action lawsuits against wireless carriers, many of which have resulted in large settlements. Contract law typically requires a meeting of the minds on terms of agreement for terms to be legally enforceable. And consumer protection laws prohibit unfair and deceptive trade practices. Accordingly, wireless carriers must make ETF options and terms clear and understandable to consumers, or face additional class-action suits and lose customers to marketplace rivals.

In late August, the FCC posed a number of questions about point-of-sale disclosures about ETFs in its Notice of Inquiry for Consumer Information and Disclosure and Truth-in-Billing and Billing Format & IP-Enabled Services. The key paragraph (#31) in the FCC’s NOI asks questions relating to the adequacy of point-of-sale disclosure, such as:

Do consumers receive sufficient information to understand, prior to subscribing to a service, the full range of potential costs and fees associated with that service? Are disclosures that are currently being provided useful and easy to understand? For example, are early termination fees being clearly disclosed including whether and how such fees are prorated? Do consumers understand how such fees will be prorated if they terminate service before the end of the contract? What point-of-sale disclosures are most important for wireless data plans, now growing in popularity with the use of smart phones and netbooks? Should wireless providers be required to disclose the cost of any “free” or “discounted” handset or other end-user device, such as a netbook that is recovered through monthly service payments made by the subscriber?

Now these NOI questions raise some threshold jurisdictional questions about whether the FCC rather than the Federal Trade Commission (FTC) should be inquiring about consumer protection and point-of-sale disclosures about smartphones and (especially) netbooks. Regardless, in its survey of the ETF landscape the FCC should take into account the role of existing consumer protection laws that have been on display in recent ETF class-action lawsuits. Existing statutes and case precedents arising under such statutes already provide a mechanism for creating customary common law of ETFs. Another factor to keep in mind is the disciplining effects of marketplace competition in keeping wireless carriers open and honest in their dealings with consumers.

Significantly, however, the FCC Wireless Bureau’s recent letter to Verizon Wireless about its recent ETF increase for one of its new smartphone offerings poses questions going beyond disclosure to consumers. The Wireless Bureau’s letter extends its inquiry to ETF rates and smartphone prices. In particular, the Wireless Bureau’s letter ask about the “rationale” for ETF increases, “cost differentials” for what advanced wireless devices cost the carrier “over what it charges its consumers,” and the dynamics or role of advanced wireless device wholesale prices charged by manufacturers.

As I relate in my FSF Perspectives piece, “[t]o the extent that an ETF might exceed the supposed value of the wireless device or service, at that point the ETF is simply a more expensive price option. ETFs are essentially a price component of cell phones and wireless devices.” Because consumer preferences differ and market supply and demand is in continuous flux, no absolute value for a product or service exists. In such circumstances—and especially in a dynamic marketplace devoid of monopoly—the marketplace itself should set the value and price. The wireless marketplace is characterized by such dynamism, giving consumers a lot of device and service choices. This makes the imposition of price controls through ETF regulations an unnecessary restriction. It would be disturbing – and ill-advised -- if the FCC’s price questioning is intended to foreshadow price regulating.