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10 February 2013

Telecommunications Breakage

Telecommunications Breakage is the practice of requiring a telecommunications customer to pay for more service than is actually used. Perhaps you think telephone companies set their plan amounts roughly according to the amount the average customer uses. This is not the case. The companies optimize the plan amounts to maximize the amount of paid but unused service. For example; say a telephone companies records indicate the average customer uses 120 minutes per month. Instead of setting the plans to include 120 minutes, the plans will be set at 100 and 200 minutes, maximizing the number of customers who pay for time they don’t use.
This is not a theoretical exercise. Telephone companies, gift card issuers and others routinely use breakage as an easy profit center.
Breakage is reported in a company’s 10-K report to the Securities and Exchange Commission. The disclosure is listed under “Summary of Significant Accounting Practices”.