AT&T to raise fees for iPhone contract breakers

AT&T is raising the fees it charges buyers of the iPhone and other smartphones if they break their two-year contracts, while lowering them for "dumb" phones to better align the fees with their real costs.

Starting June 1, smartphone buyers will have to pay $325 for breaking their contract, up from $175 currently. For buyers of regular phones, the fee is being decreased by $25 to $150.

The early termination fee goes down for every month customers stay in their contract — by $10 for smart phones and $4 for regular phones. So if a smart phone contract is broken after two months, the termination fee is reduced by $20 to $305.

The changes only apply to new contracts and renewals.

AT&T charges customers $199 for the latest model of the iPhone, but pays Apple far more than that. AT&T makes the subsidy back through the customer's service fees over the two-year contract period. AT&T likely loses money for every customer that breaks a contract and pays a $175 termination fee, but may break even with the new, higher fee. A new iPhone model is expected to be announced next month.

Meanwhile, simpler phones may cost AT&T only $125 to buy, meaning that a $175 termination fee is excessive.

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Following the same logic, Verizon Wireless doubled its smartphone termination fees in November, from $175 to $350. Sprint Nextel and T-Mobile still charge the same termination fees for all types of phones: $200. All three also pro-rate the fees for customers who leave later in their contracts.

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The Federal Communications Commission has questioned Verizon Wireless about the higher termination fees for smartphone users, but hasn't taken any action.

The pro-rating of the fees came about after the carriers settled several class-action lawsuits by customers who found it unfair that they paid the full termination fee when breaking a contract after nearly two years.