“A modern version of a long-time scam in which consumers’ phone bills are used as a vehicle for unauthorized charges placed by third parties.
That’s the Federal Trade Commission’s definition of “cramming,” and it sounds like the kind of shady activity cyber criminals hiding out overseas would be duping unsuspecting smartphone owners into signing up for.
Instead (and perhaps shockingly so), it’s something that the FTC is accusing major American carrier T-Mobile (TMUS) of doing.
Yes, the self-proclaimed “un-carrier” is accused of profiting from the actions of crammers, to the tune of hundreds of millions of dollars.
To be clear, premium SMS texts aren’t all scams. For example, the popular TV show American Idol relies on viewers using SMS texts for voting. However, unscrupulous scammers and cyber criminals have all sorts of methods for tricking unsuspecting mobile phone owners into agreeing to sign up for premium text services.
As pointed out in our feature on online scams, the premium SMS text often starts as a website that convinces visitors to enter their mobile phone number. From there, a monthly charge is added to their cellular bill ($9.99 is a popular number because it’s under the $10 level at which people start to get suspicious, and at a glance it looks as though it could be a legitimate add-on charge of some sort from the carrier). That $9.99 is charged every month until the customer notices and takes action to cancel the service.
The FTC suit against T-Mobile alleges that TMUS was essentially complicit with the third-party companies who were charging its customers for these premium SMS texts, as it “knew about these fraudulent charges and failed to take any action,” according to FTC Consumer Protection Director Jessica Rich.
In its announcement of the charges against T-Mobile, the FTC alleges the carrier not only billed the services (despite a high level of consumer complaints that should have set off alarm bells), but it buried those charges within pages of bills and used abbreviations that made it difficult for customers to identify the recurring premium text charges for what they were. In addition, for prepaid customers, the premium text subscription fee was simply deducted without notice.
A Black Eye for T-Mobile
But why would T-Mobile participate in deceiving its own customers?
According to the FTC, the company was receiving a cut of between 35% and 40% of the proceeds — a take that amounted to hundreds of millions of dollars.
T-Mobile is hardly the only carrier to have profited from premium SMS texting services. In fact, it was only last November that AT&T (T), Verizon (VZ), Sprint (S) — and T-Mobile — agreed to drop most premium SMS text billings after pressure from regulators. As All Thing’s D’s Ina Fried pointed out at the time, T-Mobile CEO John Legere was quickly on Twitter (TWTR) trying to promote the concession as a win for his customers.
The responses to Legere’s tweet were largely positive, but considering T-Mobile is being accused with burying charges in bills and scooping up a chunk of the profits — the outcome is likely to be much less rosy this time around.
In its July 1 press release, the FTC doesn’t pull any punches:
“In a complaint filed today, the Federal Trade Commission is charging mobile phone service provider T-Mobile USA, Inc., with making hundreds of millions of dollars by placing charges on mobile phone bills for purported “premium” SMS subscriptions that, in many cases, were bogus charges that were never authorized by its customers.”
No matter how you look at it, and no matter whether the claims stick, this is a public relations problem.
The PR black eye will only be worse with the FTC claims that T-Mobile often failed to provide full refunds after charging customers for years, refused some altogether and directed others to chase the third-party companies if they wanted their money back.
Financially? It’s hard to say. “Hundreds of millions” is a big range, and all of it covers TMUS’ $35 million made in 2013, so no matter what the scenario, that’s a considerable hit on T-Mobile’s bottom line.
However, so far, the market hasn’t punished TMUS, so one has to wonder just how seriously traders are taking these claims and T-Mobile’s likelihood of actually suffering damaged.
But one thing that does seem a bit more certain: If the FTC is successful in its bid to force T-Mobile to refund those hundreds of millions of dollars, baggage in the form of the bad publicity and the financial hit probably won’t help its bid to merge with Sprint (S).
UPDATE: After the time of writing, T-Mobile released a statement responding to the FTC action (read the complete text here) and prior to the FTC’s filing, announced it is beginning a comprehensive refund program at the end of this month.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities