I think Tim's being just a bit disingenuous here when he discusses the relative competitiveness of the cell phone market:

It’s nonsensical to say there’s no competition because consumers only choose a wireless carrier once a year (or even once every two years). Most people don’t buy computers, cars, or major appliances more often than that, yet no one claims that makes those industries uncompetitive. If consumers get crappy service during their contracts, they remember this fact and switch to a different carrier at the end of the contract period. And consumers comparison shop before they sign a contract, so phone companies have as much incentive to keep their prices low in a contract-based system as they would in a system without contracts.

It's true that purchasing at intervals doesn't rule out competition. But this argument ignores a few salient points about this particular market.

Nearly all phones are locked, minimizing their resale value. Transferring your contact information between low-to-midrange phones is difficult or impossible. Until recently, you couldn't take your phone number with you (number portability is a much-loved big-government mandate that the carriers fought tooth & nail). Although some carriers let you transfer your contract to someone else without paying an ETF, doing so while retaining your number is more than a little tricky, if not downright impossible. And of course, contracts typically last longer than a mobile phone's window of technological relevance, ensuring that these barriers will be in place until the phone is worth only a fraction of its initial value, needs a new lithium battery, and is generally headed for the donation bin.

All of these factors inhibit the emergence of a viable market for used cellphones and plans, which in turn allows the carriers to avoid some of the sorts of competitive pressures facing refrigerator and automobile manufacturers. Yes, they have an incentive to keep their prices low in a contract-based system — but only within the bounds of that system. It's as if NFL players collectively agreed to play touch football for a season and used their union's power to freeze out replacement players. There could still be competition, but it wouldn't be nearly as vicious as it would need to be to optimally serve the public.

There's also this:

The iPhone point also strikes me as especially silly. The iPhone is expensive because it’s a cutting-edge gadget that’s been on the market less than a month. The fact that some of the cost comes in the form of a 2-year contract, as opposed to an up-front sticker price, is beside the point. If you think the iPhone, 2-year contract and all, is too expensive, buy a different phone. There are plenty to choose from.

But the point Ars is making is that the iPhone actually isn't being subsidized by the contract fees. Consumers are buying the hardware at full retail price and being locked into a contract. This puts the lie to the carriers' argument that early termination fees are in place to avoid losses over hardware subsidies — they charge the fees whether there's a subsidy or not (and only one carrier will prorate this fee). Nor do customers have a way of opting out of this fraudulent system of portable phone paternalism. As Farhad Manjoo wrote yesterday:

You can't offer to pay full price for a handset in exchange for a reduced early-termination fee and an unlocked phone -- no major firm will let you do that. Indeed, in some instances carriers will charge you a fee even when they don't offer you any break on the price of the phone. The iPhone is the primary exhibit: AT&T doesn't subsidize the price of the phone, but you're still locked to a single provider.

I'm currently facing an ETF from T-Mobile for an account I set up without receiving a handset (I used it for my now-defunct DCist SMS service). In retrospect I should've signed up with a prepaid service. That would've been fine for my application, but these services typically charge more for services and offer less advanced phones. They're designed for customers who are credit risks (or drug dealers!). Unlike in Europe, prepaid is clearly not a viable way to opt out of the contract system.

The actual reason the fees are in place is to prevent "churn" — the frequent switching between carriers by customers seeking better service, handsets or prices. Obviously this is a nuisance to carriers, and has real administrative costs. But surely the overhead to customer acquisition and early account termination is less than $150 (and if it is, surely it ought to be pro-rated when a customer has fulfilled part of their contract). No, the carriers are transparently using the fee to introduce friction into the marketplace, allowing them to extend the lifecycle of each generation of technology and spend more time in the pleasantly wide part of the margin that comes once they've paid off their capital investments.

There's nothing wrong with wanting to post nice fat profits, but I don't see a reason why we should enable this cartel-like activity. Customers will be better served by a faster-moving market. As it stands, customer dissatisfaction remains high across the industry, text messaging rates are going up rather than down and all customers with sub-smartphones remain locked into buying software exclusively from their carriers, despite countless forums filled with people vainly asking how to load mp3s as ringtones. And although the internet jumped all over Ted Stevens for wanting a phone that would seamlessly rollover from wifi to cellular to landline access, his request wasn't unreasonable (well, except perhaps for the bit about the motorcycle) — VoIP/cell handing-off is useful technology that's been available for years, but is just barely showing up in the consumer marketplace.

It's simply not a very good or competitive market. Everybody hates it, and we ought to fix it. I have no idea whether a more open market would increase the total monthly expense of owning a cell phone. But even if it does, I suspect it would open up a lot of potential for growth of other industries — independent cellphone software, least-cost VoIP routing, third-party ringtones, better handsets, location-based services and who knows what else. Wireless data is a utility, not a retail product. Its market ought to be opened up.