Bad news for US iPhone users, as AT&T (NYSE:T) has reportedly raised Early Termination Fees (ETFs) for premium smartphones effective June 1, 2010. Ma Bell has bumped up the ETFs on such devices from the existing $175 to a whopping $325, making it much more costly for customers who break service contracts early. However, the carrier has pruned the ETFs for regular handsets from $175 to $150.

Additionally, the ETFs owed will be reduced by $10 and $4 for smartphones and regular phones, respectively, for every month of service completion prior to cancellation. So if a smartphone customer leaves after six months under a two-year contract, ETF will be cut by $60 and he/she will be charged $265. The revised rates will only be applicable to new customers and those renewing contracts.

AT&T has argued that the ETF adjustments will help it to better align fees with handset prices. The carrier’s move came amid speculations that it may lose marketing exclusivity on the iPhone this year with archrival Verizon (NYSE:VZ) likely emerging as the second carrier to offer the iconic device.

Apple (NASDAQ:AAPL) is expected to unravel the next-generation iPhone as well as new carriers for the device at the Worldwide Developer Conference in June 2010. It appears that AT&T is using its new ETF policy as a defense measure to deter iPhone customers from switching to rivals (if any) as it faces the threat of losing iPhone exclusivity.

ETFs, a widespread practice in the wireless industry, are charges/penalties levied by the cellular operators on their customers who wish to break the term of an agreement or long-term contract. Wireless carriers require their subscribers to sign up for long-term contracts (typically two-year) given the high subsidies on handsets, which they regain over the course of the agreement.

As such, carriers use ETFs as a means to recoup the cost of the phones if subscribers choose to prematurely end the contract. Verizon doubled its ETFs to $350 in November 2009 while both Sprint Nextel (NYSE:S) and Deutsche Telekom’s (NYSE:DT) US arm T-Mobile USA charge customers $200 who choose to leave early.  

The US telecom regulator Federal Communications Commission (FCC) launched a formal probe on ETFs in January 2010 asking carriers to justify the hefty fees they charge their contract customers. The FCC argued that customers have the right to detailed information about the service plans with an ETF since there is no industry standard on such fees. Moreover, the regulator stated that such fees are substantial and curb customers’ ability to switch carriers.

However, in support of the carriers, CTIA (the wireless trade association) stated that ETFs allow operators to offer heavy price subsidies to customers to encourage phone purchases. CTIA opines that the incumbent carriers also offer options to customers in choosing their plans and devices without subsidies and ETFs.

The FCC initiated a formal investigation into ETFs in late 2009 following Verizon’s controversial hike in fees for its smartphone customers. The regulator questioned the carrier about its exorbitant fee of $350 for advanced devices (such as the BlackBerries and Droids). Verizon echoed CTIA’s justifications in its reply to the regulator. AT&T seems to have mirrored Verizon’s strategy by changing its ETF policy.

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