Sunday, October 26, 2014

Will Mobile Churn Start to Rise as Mobile Marketing War Persists?

Logic would suggest that as more customers shift from mobile service contract plans to “no contract” service plans, the amount of churn would increase.

Ever since T-Mobile US launched its “no-contract service” in 2013, observers have speculated about the potential impact on industry churn dynamics, marketing costs and revenues.

So far, that seems to have been less a concern for AT&T and Verizon than for Sprint and T-Mobile US, though likely for reasons that have only a bit to do with the types of service plans offered.

Since at least 2009, U.S. mobile service provider churn rates have stabilized at very low levels--at least for AT&T and Verizon. Sprint and T-Mobile US, on the other hand, have churn rates that are common for a consumer service.

In the first half of 2014, churn rates for the largest four national mobile providers ranged from about one percent for AT&T and Verizon--quite low for a consumer service--to nearly three percent a month for Sprint and T-Mobile US, a rate often seen for consumer services.

Most would attribute the widespread use of contracts as a driver of the lower churn, as a two-year contract tends to create a customer relationship that lasts at least that long.

Others might also focus on family or shared user plans. One observable fact is that when multiple users in a household share a plan, the amount of churn shrinks, as the hassle an cost of switching is much higher than for a single user plan (new phones might have to be purchased, for example).

So fewer customer choosing contract plans should lead to higher churn. One example is the contrast between churn rates of postpaid customers (often on contracts) and prepaid customers (rarely on contracts).

In the past, no-contract service might have been much more characteristic of prepaid service, and in fact prepaid churn has been higher than postpaid churn, for quite some time.

But that approach now is more common in the postpaid space. So observers will be watching for signs that postpaid churn is growing, especially at AT&T and Verizon.

Still, in the third quarter of 2014 AT&T Mobility actually achieved a lower churn rate than it had experienced before, in any third quarter. Skeptics might point to a slight uptick between 0.86 percent monthly churn in the second quarter and 0.99 percent in the third quarter.

That does not confirm a trend, as churn rates fluctuate quarter to quarter.

But some observers warn that could change in the fourth quarter, when a number of customers not on contract decide to buy new iPhones, and might choose service from another provider.

The reason for the concern: AT&T has been offering lower prices on shared data and “no device subsidy” plans for much of the year, in return for customers switching to non-subsidized device plans.

AT&T prefers that approach because it lowers the cost of providing devices for its customers.

But the potential downside is the shift away from contracts.

Customers generally do not prefer contracts, but service providers like them for a couple of logical reasons: they “lock in” customer accounts at least for the duration of the contract, and smooth out recurring revenue flows.

That logically also lowers marketing cost, as a service provider does not have to work so hard to retain or attract quite so many new customers.

On the other hand, by separating service terms and device subsidies, service providers can market lower recurring costs, and shift some of the costs of providing devices to end users. At least so far, overall revenue seems to be level or up slightly, even if recurring service revenues might be lower.

Some might say that AT&T faces a latent pool of switchers--accounts that are off contract and free to leave, and which also have not switched to a lower-cost shared data plan.

AT&T is likely to find that the actual exposure is single-user accounts, not shared data or family accounts.

And almost nobody would be surprised if the amount of churn among all four national carriers starts to grow a bit, because the mobile marketing war will encourage users to switch.

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