Verizon, Sprint Set to Pay for Cramming; FTC Orders Refunds

In accordance to a settlement reached with the Federal Trade Commission (FTC), Verizon Communications Inc. VZ and Sprint Corp. S have agreed to refund $90 million and $68 million respectively to their customers, as a compensation for their unlawful ‘cramming’ practices.

Cramming refers to a common malpractice among telecom service providers, whereby hidden charges for services like horoscope, celebrity gossip and the like are imposed upon a customer, resulting in inflated bills. No prizes for guessing that these charges involve services that are not opted for by the customer.

Per the FTC order, current and former subscribers of Verizon and Sprint who had been wrongly forced to pay for such services since July 1, 2010 are now eligible for a refund. They will have to file a request for the same with their service provider within Dec 31, 2015 to get the refund. In 2014, AT&T Inc. T and T-Mobile US Inc. TMUS too had to settle similar federal lawsuits. The two companies ended up shelling out $105 million and $90 million respectively in the process.

A Deeper Insight

According to official reports, Verizon was found to have been unfairly charging customers for third party messaging services at $9.99 per month till Jan 2014. As for Sprint, the carrier resorted to cramming from 2004 through 2013. It created a billing and payment-processing system that gave third party service providers virtually unrestricted access to its customers’ accounts and then automatically enrolled such customers to their services. Both the companies claim that they had already started reversing their wrongdoings, much before the government called for an action, by discontinuing such practices and refunding customers against charges imposed illegally.

The Companies in Focus

Verizon

In a separate event, the Federal Communications Commission (FCC) recently launched an investigation into the competitive impact and the terms and conditions of business Internet contracts. The investigation will primarily focus on the handling of special access, which comprises the wide range of data connections that business enterprises purchase from Internet service providers for data and communication needs. Thus, Verizon is now under the FCC scanner in the special access market, where it enjoys a leading position.

Moreover, Verizon recently forecasted that its earnings will likely be flat on a year-over-year basis in 2016 as it does not see enough variables for growth in the upcoming year. An already unexciting prospect in the near term coupled with the current settlement payout may set the company slightly back in the upcoming quarters.

Sprint

Sprint is, at the moment, severely cash strapped. The company has a debt-laden balance sheet and negative operating cash flow. It has been witnessing losses annually since 2007 and its second-quarter fiscal 2015 free cash flow was a negative $100 million compared with a negative $75 million in the comparable prior-year period. Moreover, Sprint relies on heavy spending for promotional offers and lucrative discounts, in a bid to increase its customer base. Thus, the said cash settlement of $68 million is likely to strain the company’s finances further. This may impact promotional activities, adversely affecting customer addition as well. 

Both Sprint and Verizon presently carry a Zacks Rank #3 (Hold).

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