If you have a cell phone, you’re probably under a contract. The contracts are usually long with loads of fine print, but they all boils down to a simple deal: The cell phone provider will provide cell phone service for you, so long as you pay them for it. There are many different types of cell phone contracts, but the most popular one these days is one where the customer signs an agreement to stay with a cell phone provider for the 2-3 years in exchange for a heavily-discounted phone. And if you choose to break that contract, you agree to pay a penalty (usually $200-$300). This type of contract really isn’t that special, for I’m sure you can find similar arrangements over all types of businesses.

But not for long. Yesterday, news broke about a ruling out of California that stated that the early-termination fees are “illegal.” Sprint must pay back about $18 million in early-termination fees to its California customers and stop trying to collect on $54 million in fees not paid. I haven’t been able to find a court document or news story that explains the judge’s reasons for the ruling, but I bet it can’t be good. I don’t know if I even want to know how a judge can rationalize why the government must step in and nullify this one section of an explicit, voluntary contract. I’ve read a lot of commentary about this ruling, though, and I think the following statement is a good example of the general opinion that many have about this.

From Mark Selfe at the Red Herring blog:

I’m all for the idea of setting up purchase plans directly with the manufacturers and not the subsidized carriers. This gives the consumer more control. When I buy a car I’m not forced to sign up with a gas company to exclusively buy their gas for the next two years. It just doesn’t make any sense.

What’s missing in this argument (and in most people’s arguments on this) is the fact that a customer made a commitment to pay that fee for leaving early. In exchange for that commitment, the customer received something from the cell phone provider. It might have been a new, fancy phone, or a cheaper monthly rate than someone who won’t make a long commitment. By what right could a customer feel entitled to break that agreement, especially when he or she has already received something in advance (like a fancy cell phone)? There’s another word for that: Theft. It’s like buying something with a bad check. You can walk out of the store with the item, but it’s not yours. And at that point it’s not just a matter of returning the goods, it’s also a matter of dealing with the fact that you knowingly stole something from another individual.

The government’s proper role in situations like these are to enforce the contracts. I know there are problems with our legal system, but it boggles my mind that it can really be so bad that the government would actively take a role in making sure that customers were let out of the contracts they signed. Selfe says that it gives consumers “more control,” but he has it backwards. Without a government that will enforce contracts, our word means nothing. Nobody would enter a long-term agreement with another individual if they knew that nothing would happen if the agreement were broken.

I think the government’s role in enforcing contracts is just one side of this situation, though. Another side is the value of one’s word. Should you do what you say you are going to do? Should you fulfill your commitments? Sadly, I don’t think most people think about this. Or worse, they don’t even care. Some are hopeful this could help them out of their own contract, some have grand ideas about how the cell phone industry “should work,” but hardly anybody will say, “I will honor my agreement because I said I would.”

For anybody who is happy about this ruling, I have one simple question: How much is your word worth?

Yesterday I ran across an article on the Wall Street Journal’s site titled “Free My Phone.” This article, written by Walter S. Mossberg, argues that it is time for the government to prevent cell phone carriers to control their networks in ways that hurt consumer choice. Of course, I have a few problems with his argument.

Digital capitalism

Mossberg opens with a description of all of the choice and control consumers have when it comes to choosing computer hardware, software, and the internet connection we want. If we don’t like something, we just swap it out with something else we want. He later compares the PC market to the cell phone market, but after he writes:

Oh, and the developers of such computers, software and services can offer you their products directly, without going through the Internet provider, without getting the provider’s approval, and without giving the provider a penny. The Internet provider gets paid simply for its contribution to the mix: providing your Internet connection. But, for all practical purposes, it doesn’t control what is connected to the network, or carried over the network.

This is the way digital capitalism should work…

That’s not how capitalism, or even digital capitalism (whatever that is), works. Capitalism is an economic system that is founded in individual rights. Under capitalism, an individual is in charge of his own life, liberty, and property, and the only way to obtain anything from another individual is through persuasion and trade. This system will naturally tend to produce a large number of options for consumers as producers compete with one another, and the examples Mossberg provides is a good example of how that competition has greatly benefited the computer market. Depending on the situation, though, a market with a small number of options (or no options, for that matter) may exist. Since capitalism allows people to act according to their own will, results will vary.

It’s a mistake to measure capitalism by counting the number of options a consumer may have. The only way to determine if capitalism exists is to check for the foundation of capitalism: respect for individual rights. That’s how capitalism works. If Mossberg wanted to show that a free market really doesn’t exist in the cell phone industry, he should start by showing who is being forced to act against his or her free will, and by whom. And when I say “forced” I mean the physical type, not the “I had to sign a contract before they’d give me an iPhone” type. The latter isn’t really force, it’s just terms that are part of a voluntary agreement.

Soviet ministries

Mossberg writes:

That’s why I refer to the big cellphone carriers as the “Soviet ministries.” Like the old bureaucracies of communism, they sit athwart the market, breaking the link between the producers of goods and services and the people who use them.

What’s missing here is the fact that cell phone carriers are producers of goods. They produce network service that allows cell phones to operate. Rather than break the link between cell phone makers and cell phone users, as Mossberg describes, cell phone carriers build the link. If it wasn’t for the service cell phone providers create and offer to consumers, our cell phones would be reduced to being electronic address books or horrible digital cameras.

I think Mossberg is missing the real lesson to be learned from the real Soviet ministries. The reason the Soviet ministries could not produce what the free market could was the fact that the government controlled everything. While those in the free market were able move and adjust to demand, the Soviet government dictated what would be produced regardless of need or demand. For those who want to avoid the types of results created by the Soviet government, the lesson should be clear: Keep government out of the market. But unfortunately, government intervention is what Mossberg advocates.

Deserves to make a profit…

Mossberg tries to offer some consolation to the cell phone companies:

Let me be clear: Any company that spends billions to build and maintain a wireless network deserves to be paid for its use, and deserves to make a profit and a return for its shareholders.

I disagree. A company does not deserve to make a profit solely by spending billions on a wireless network. It takes more than that to deserve a profit. After building the network the company has to sell its services, and only by making those billions back can the company deserve its profit. The only thing that a company deserves by building a multi-billion dollar network is control over that network. And it’s that control that Mossberg wants to take away:

Not only that, but companies like Verizon Wireless or AT&T Inc. should be free to build or sell phones or software or services.

But, in my view, they shouldn’t be allowed to pick and choose what phones run on their networks, and what software and services run on those phones.

In other words, cell phone carriers should not be “allowed” to control their own networks. When Mossberg says “Free My Phone,” he’s not referring to his ability to control his phone. He’s really referring to his ability to dictate what cell phone carriers do with their own property, and he can’t do that without government intervention.

I don’t read the Wall Street Journal very often, but from what I’ve heard the paper is one of the most pro-capitalist papers available today. If that’s true, I’m very surprised to read an article like this on their website. Technology issues like these might seem complex, but government intervention is government intervention. I believe that the best think for the cell phone industry — or any industry — is to allow individuals to be free to make their own decisions with their own lives and property. Keep the government out.