Canceling iPhone service early will cost $175

AT&T Inc. has spent $50 million to beef up its relatively slow wireless network in anticipation of the heightened activity expected to follow the iPhone's debut next week, but any customer who isn't wowed by the new gadget will find it costly to cancel the service.

Even though AT&T isn't subsidizing the iPhone's hefty price -- $499 to $599, depending on the storage capacity a customer chooses -- the company will charge a $175 termination fee for iPhone users who want to break their two-year contracts.

Most cellphones sell for less than their true cost, with the cellular network paying the difference. In exchange, customers promise to use the service for a set period, usually two years. When subscribers cancel early, phone companies charge a cancellation fee, usually citing the need to recoup the cost of the subsidized phone.

But AT&T spokesman Mark Siegel said that termination fees pay for more than phone subsidies. "There are certain fixed costs we incur in serving every customer who establishes service with us," Siegel said. He refused to specify those costs.

Michael Gartenberg, vice president of JupiterResearch in New York, called the iPhone termination fee "a little odd," but doubted that many customers would object. "I don't think for most consumers it's an issue," he said.

Gartenberg noted that AT&T's deal with Apple bars it from cashing in on some profitable online businesses. For instance, while companies like Verizon are selling music over their networks, iPhone users will buy tunes only from Apple's iTunes Internet service, depriving AT&T of a rich revenue stream. On the other hand, iPhone users will be an affluent group, and likely to spend more on data and voice services than other AT&T customers. Gartenberg suggested AT&T's termination fee is a bid to boost its revenues by raising the bar for cancellation and hanging onto these affluent customers as long as possible.

Richard Burns, president of AT&T's wireless business, acknowledged the iPhone uses a data network that isn't as fast as those offered by rivals Verizon Wireless LLC and Sprint Nextel Corp. But he said the combination of AT&T's network and the iPhone's efficient design would make it a superb Internet access device.

"It's really the total experience that the customer cares about," Burns said. He noted that most phones with Internet access use relatively clumsy technologies to squeeze Web pages onto tiny phone screens, while the iPhone will use a modified version of Apple's popular Safari browser.

"It's a true full-fledged Internet experience," said Burns. He said this will make Web surfing on the iPhone more appealing and therefore more popular, so AT&T expects a significant surge in data network traffic as the iPhone comes to market. "We really think it's going to drive Internet access through our wireless network to different levels," he said.

According to the technology research firm IDC, about 10 percent of Americans with cellphones currently pay for wireless data services. IDC researcher Julien Blin disagreed with Burns, saying it's unlikely the iPhone will inspire much of an uptick in wireless traffic because most consumers aren't willing to pay the extra cost. "I don't think that the iPhone will be a game-changer," Blin said, "at least not in the near future."

Hiawatha Bray can be reached at bray@globe.com.