Verizon's sky-high ETF: Do the math

Bloggers have speculated that Verizon's fat new $350 fee for breaking its smart phone contracts is intended to thwart phone flipping, a scheme in which you take the two-for-one deal, quit the contract on the second phone, then sell the handset on eBay at a profit, even after you pay the old $175 early termination fee (or "ETF").

Verizon didn't directly answer when we put that theory for the $350 ETF to them. "Our general reasoning is that it reflects the higher cost associated with the phone," said Tom Pica, a Verizon spokesman.

That suggests Verizon is giving customers bigger savings in the form of a bigger subsidy for those devices out of its own pocket, right?

Wrong.

As we've previously reported, consumers repay the handset subsidy they get up-front with a "free" or deeply discounted cell phone. The recoupment cost of that subsidy is built into your monthly cell service fee, generally running about $5 per month, so the "subsidy" is really more like a loan you repay over the life of the contract.

Further, Verizon charges higher monthly plan fees for its smart phones than some other carriers.

Verizon's higher smart phone monthly fees are revealed in a side-by-side comparison of its Blackberry Storm2 and AT&T's iPhone 3GS (16Gb). Both phones are comparably priced with a two-year contract: $180 for the Storm2, $200 for the iPhone. But if you buy comparable monthly plans with 900 voice minutes, plus data, plus unlimited messaging, Verizon charges $10 a month more: $120 for the Storm2 plan vs. $110 for the iPhone plan. Over a two-year contract, $240 more goes to Verizon for Storm2 service.

That extra $10 per month should help recoup the cost of Verizon's "Buy one, get one free" promotion, in which a buyer of one $180 Storm2 can get a second one for free. Apple doesn't offer the same deal on the iPhone. Of course, the higher monthly service fees on the voice and data plan you'd have to buy on that second "free" Storm2 also adds to the recoupment of the up-front subsidy on that handset. —Jeff Blyskal

—Paul Eng