Prepaid profit plan for wireless companies

Introduction

Since January 2002, the nation’s wireless phone companies have been slipping some mysterious new fees in the bills of their 101 million customers.

Those who bothered to ask were told that the fees, which ranged from a nickel to $1.75 per month, were needed primarily to cover the wireless industry’s costs for implementing “number portability,” a new service that will allow phone users to keep their same number when switching from one wireless company to another.

What the companies didn’t say, however, was that they were preemptively collecting fees for a service that would not be available for another 23 months. What’s more, the companies were charging the new fees with the full knowledge and approval of the Federal Communications Commission, the government agency that is supposed to look out for the public on telecommunications issues.

The cost to wireless phone customers: $629 million so far, and still climbing.

After nearly eight years of delays and false starts, an FCC-mandated wireless portability initiative is expected to go into effect November 24. Experts say the service could have been up and running years ago had it not been for a steady barrage of legal challenges and other delaying tactics by the wireless industry.

“Consumers are being bilked billions of dollars and there’s nothing that they can do about it,” said Chris Murray, legal counsel for Consumers Union in Washington, D.C.

A Center for Public Integrity survey of the 10 largest wireless service providers shows that nine of them have been collecting so-called recovery fees.

Eight are collecting fees to cover the cost of number portability. Nine companies are collecting money for “number pooling,” a closely-related program which allows wireless companies to assign numbers more efficiently. Six of the companies are collecting fees for the Federal E911 program, which requires carriers to relay the telephone number of a 911 caller to the closest emergency department. And two of the providers collect a fee to cover the costs of the Communications Assistance for Law Enforcement Act, passed in 1994, which requires carriers to comply with electronic surveillance rules.

Typically wireless phone companies lump each of these fees into a single line item on subscribers’ bills under something called a “federal recovery fee.” Exactly how much of that fee is going toward number portability is difficult to say. But FCC filings and interviews with company officials indicate number portability is being used to justify the collection of hundreds of millions of dollars from subscribers.

The FCC is relying on the companies to come up with their own estimates on what portability will cost and does not require the companies to make that information public. But the Center survey found little consistency in those estimates or in the fees charged.

For example, Verizon Wireless Inc.—by far the largest wireless company in the country, with 32.5 million subscribers—has estimated its cost for implementing the change at $60 million.

In contrast, Cingular Wireless LLC, the country’s second-largest wireless company with nearly 22 million customers, estimates that number portability implementation will cost them between $152 and $177 million in 2003 alone, according to an August court filing. Cingular is a joint venture between SBC Communications Inc. and BellSouth Corp.

To meet the FCC’s November 24 deadline, companies say they have spent millions of dollars. Surprisingly, some of the companies who say they must spend the most money to comply with the portability rule—both as a total cost and on a per-customer basis—are among the smallest. Nextel Communications Inc. estimates it will spend $100 million for 10.6 million subscribers. Verizon Wireless estimates it will spend only $60 million for its 32.5 million subscribers. In other words, Nextel estimates it will spend five times as much per customer to make number portability possible as Verizon.

Nextel was the first to begin charging fees to meet the three federal mandates, starting at 55 cents a month beginning in January 2002. Nine months later the fee was raised to $1.55 following a “regular review” by the company.

That means Nextel will have collected $283 million before it ever ports a number, even though it estimates its implementation costs at only about $100 million. The company denies taking advantage of its customers with the new fees.

“This is not something that we are looking at in terms of being a revenue generator,” said Nextel spokeswoman Leigh Horner.

Pay to stay

The huge differences in the cost estimates for implementation among the different companies defy easy explanation.

Patrick Forster, a top wireless expert at the FCC, said all the companies are using the same type of equipment to upgrade their systems to meet the requirement standards. In fact, it is likely that the companies are purchasing the hardware and software from the same suppliers, since only a handful of companies provide such equipment.

Or the differences in total estimated costs may be due to what the company considers to be a portability expense. John Muleta, chief of the Wireless Bureau at the FCC, said that a company might say it is spending $200 million a year on portability, but that could include items such as marketing to win back customers who might otherwise be inclined to take advantage of the new rule to switch to a different wireless company.

“Is that really part of the local number portability mandate?” he asked. “[The companies] are saying it is a cost.”

Clay Owens, a spokesman for Cingular Wireless, said some of the costs included in his company’s $152 million to $177 million figure are for “retention, acquisition, and other sales costs.” In other words, Cingular and some other wireless companies have folded some of their marketing costs into their budget for implementing number portability, and are then passing those costs on to their customers.

FCC rules don’t prohibit companies from charging recovery fees for advertising and customer incentive costs. Instead, Muleta suggests, customers should pay closer attention to the charges.

“I think that if a carrier in a highly competitive market chooses to make a profit for what is, in effect, for consumer benefit, that is something that the consumers can take into account,” Muleta said.

Not surprisingly, some consumers groups disagree with the FCC’s caveat emptor attitude. “Competitive markets are predicated on good information to consumers,” said Consumers Union’s Murray.

Tight Lipped

Getting good information, however, isn’t a simple matter.

Out of the top 10 wireless companies, two—T-Mobile USA Inc. and ALLTEL Corp.— refused to disclose their implementation costs to the Center. Five companies—Verizon Wireless, Sprint PCS Corp., Nextel, T-Mobile USA, and ALLTEL—would not disclose their projected annual costs to maintain number portability after implementation. And five companies—AT&T Wireless Service Inc., Nextel, ALLTEL, United States Cellular Corp. and Western Wireless Corp.—would not disclose the fees they currently charge customers for number portability.

Nor is the FCC much help.

Muleta said that the agency has no business requiring companies to provide accurate accounting information, despite its mandated responsibility to protect the public.

“We don’t do price regulation,” Muleta said. “This is a point of competitive differentiation for the carrier. If there is one that can do it more efficiently than the other one, we figure that the marketplace will take care of itself.”

But the companies in that market have not been especially forthcoming about the fees they charge or how long customers can expect to be billed for them. Asked how consumers would know when a company’s implementation costs had been recovered, wireless companies offered no clear answers.

“There are going to be costs associated with [number portability], but at some point you absorb that cost for introducing that into your business,” said Larry McDonnell of Sprint PCS. “Then I think that just becomes another cost of your doing business.”

And when those costs will be absorbed is something the wireless companies can decide for themselves.

“There is zero accountability here,” said Consumer Union’s Murray. “There’s no way for consumers to know. Forget about trusting the carriers to be honest in their accounting for what these line items cost, we don’t even get [an accounting]—consumers have no information whatsoever about what the costs of these mandates are.”

A surprising about face

For years after the FCC approved the number portability rules in July 1996, the wireless companies resisted offering the service. Then, four months ago, Verizon Wireless abruptly broke away from its fellow wireless carriers and endorsed implementation of the service.

Verizon Wireless CEO Dennis Strigl told an audience at an industry conference that his company would put its full weight behind number porting.

That announcement came shortly after the D.C. Court of Appeals ruled against the wireless companies and upheld the FCC’s November 24 implementation date. Other carriers and their trade group, the Cellular Telecommunications & Internet Association, continue to fight the rules.

By “the end of June, the final court case had been decided and we did not win that,” said Jeffrey Nelson, a Verizon spokesman. “We really gave it the good college try to fight this mandate.”

U.S. Cellular CEO John E. Rooney said that Verizon Wireless “cut their losses and ran.”

That doesn’t mean that Verizon Wireless has simply stood aside, however. Since June 24, Verizon Wireless representatives have met with senior FCC officials 14 times to discuss number portability—at least once with each of the five commissioners’ offices.

Despite the court setback, three companies have continued to aggressively fight the mandate. ALLTEL, AT&T Wireless and Cingular are still trying to postpone number portability. On June 16, the three companies filed a petition to rescind the new regulation, which questioned the FCC’s authority to impose number portability in the first place.

Cingular’s Owens said his company believes the FCC doesn’t have the authority to implement the new rule. “The FCC acted outside of their jurisdiction,” he said.

Eight years and counting

But fighting the FCC ruling or pushing for its delay hasn’t stopped wireless companies from charging consumers. AT&T Wireless, for example, was charging a number portability fee to almost one-third of its customers as of July—about 7 million subscribers, according to Rochelle Cohen, a company spokeswoman.

The company would not disclose how much of its $1.75 per month recovery fee is going directly to defray the implementation costs for number portability. But if just $1 of that monthly fee is going toward number portability, the company can collect about $84 million per year and pay off its estimated implementation costs in less than two years.

It’s not clear what will happen to the money if the rule is rescinded. When asked, Muleta said it “would be reasonable” for companies to return the money to their customers.

Verizon Wireless has not started charging for number portability, but may add fees of 10 to 15 cents per month per customer once the rule takes effect, said spokesman Jeffrey Nelson. That would generate $39 million to $58 million per year for the company, which estimates its total implementation cost at $60 million. The company has not disclosed its projected cost to maintain number portability annually after implementation.

Although Verizon Wireless said it is not charging for number portability before the November 24 deadline, the company has been levying a recovery fee of 5 cents per month for number pooling.

It is unclear where that money—about $1.6 million a month—has been going, however.

Spokesman Nelson said that the company remits all of that money to the federal government. But several FCC officials contacted by the Center for Public Integrity were unable to confirm Nelson’s claim.

The FCC “does not collect a fee for number pooling, ” said Peter Trachtenberg, Attorney Advisor in the Public Policy Division of the Wireless Bureau.

The only other top 10 company not currently charging for number portability is T-Mobile, formerly known as VoiceStream. T-Mobile is now a subsidiary of Deutsch Telekom A.G.

Verizon Wireless and T-Mobile have been outspoken advocates for number portability in the last few months, pressuring the FCC to stick to the November 24 deadline.

Not surprisingly, industry analysts believe that Verizon Wireless and T-Mobile will benefit the most from number portability.

“Customers choose wireless service based on perceived quality and perceived value,” said Roger Entner, of the Yankee Group. Based on a combination of wireless user surveys and market analyses, he said that customers consider T-Mobile to provide the cheapest service and Verizon Wireless to offer the best quality.

Everyone agrees that for number portability to be available across the country, all companies have to put the systems in place. Each company needs to be able to both port and receive a number. For live tests to take place companies have to set up scheduling and testing agreements with their competitors. That means wireless companies need to work together—not something that can be taken for granted.

“We have a difficult road ahead when it comes to making sure those systems work well together live with our customers,” said Verizon Wireless’ Nelson. “Unfortunately at this point our competitors have not agreed to do any of those live trials.”

Still, Sprint and Nextel recently made an agreement to test their systems. Verizon Wireless has reported that it is “working with other wireless service providers trying to convince them that we should do this throughout the country.”

Other companies appear to be taking more of a wait-and-see approach. Andrew Moreau of ALLTEL said “I would assume you can make a deal to do just about anything, if you can get everybody to agree to it.”