Get out of jail - almost free

A new law offers South African cellular subscribers a way to unlock fixed-term contracts, without having to pay hefty penalties.

The handsets that cellular operators use to lure consumers into two-year deals are the key to getting out of contracts. From April, consumers can cancel the deal, return the phone, and walk away.

At the moment, if consumers sign up for a 24-month contract, and then cancel it, they have to stump up for the cost of the rest of the term. As a result, a R500 a month deal could cost as much as R12 000 to get out of, if cancelled soon after sign up.

However, the new Consumer Protection Act, which comes into force in less than a month, will allow subscribers to can the deal, and only pay 10% of the balance of the contract's value.

The get-out-of-jail clause contained in the Act allows consumers to cancel fixed-term contracts at any time, by giving cellular operators 20 business days' notice in writing, regardless of the contract's terms and conditions.

In addition, draft regulations released in November stipulate that operators can only charge 10% of the value of the rest of the term. However, this could change as cellular companies have provided input into the regulations, and South Africans won't have clarity until the regulations are finalised.

The new law will change the shape of cellular deals, but exactly how they will look in future is currently the subject of speculation. The new law and its regulations are vague, and cellular companies are not yet sure how its provisions will work in real life.

Nicholas Hall, an attorney with Michalsons Attorneys, says the relative ease with which people will soon be able to cancel contracts will burden the cellular operators.

Hall says this could particularly become an issue if a cellphone was bundled with a contract, as cellular companies could be with stuck with second-hand phones. He explains the operators may find ways around this, by offering the phones at a reduced rate with contracts, or selling them second hand.

Currently, subscribers who want to get out of two-year deals if they are unhappy with the service, or want to port their numbers, have to pay for the rest of the term of the contract, and could also be forced to pay hefty penalties.

In 2008, an ITWeb investigation revealed that cellphone providers force customers to ride out their contracts, because they charge exorbitant cancellation penalties in addition to the balance of the value of the contract.

The investigation found Altech Autopage Cellular's contract to be the most expensive to exit. At least two customers were quoted almost R10 000 to cancel contracts with just over a year left on subscription. It would cost one customer R9 976.88 to exit a Vodacom Talk 130 contract that had 14 months outstanding.

Arthur Goldstuck, MD of World Wide Worx, explains that consumers are locked in because the two-year contract is actually paying for the phone. He says networks have done themselves a disservice by marketing the phones as free, as this is not the case.

Goldstuck says cellular companies will have to change the way they market themselves, because the airtime is actually the cheapest part of the deal. The way cellphone contracts are packaged is designed to confuse consumers about what they are getting, he says, as the value of each item is not disclosed.

Graham Mackinnon, Cell C's group legal counsel, adds consumers' rights to cancel fixed-term contracts is confusing, as the legislation doesn't say what happens to the goods that were handed over if the deal is later cancelled.

Vodacom's chief officer of corporate affairs, Portia Maurice, says the company's main concern is around cancellation penalties, as this will affect how Vodacom subsidises handsets to make packages more affordable for the consumer.

Virgin Mobile's chief strategy and marketing officer Jonathan Newman explains it could be problematic if devices have been used by consumers, and the Act allows them to return them “for no other reason than a change of heart”. However, the new law may allow operators to charge for the handset separately.

If operators end up with many handsets being returned, which will then become second-hand, “costs will go up and the value of deals to consumers will have to decline, which will not benefit the consumer in the long run,” says Newman.

If Virgin subscribers currently cancel a contract, the telco only charges consumers for the rest of the cost of the handset, which it stipulates separately on the bill.

Virgin does not interpret the Act as imposing obligations on companies to accept the return of a handset, and operators could insist the customer rather pay the remaining balance on the phone.

Cellular companies will find it difficult to work out the exact implications of the new law on their business models until it comes into effect, says Hall. He explains the law is vague and while final draft regulations, published last November, have helped clear up some confusion, some aspects will have to wait for a real-life test case.