In the past few quarters it seems as if nearly every carrier has had a new customer record to crow about: best-ever net new subscribers, lowest-ever churn. According to CTIA, the wireless industry added nearly 26 million net new customers in 2005, its highest year of growth ever.
But despite all the earnest talk at wireless conferences about how much growth is ahead for the wireless industry, a closer look at the numbers shows that much of the growth is simply coming from customers switching from one carrier to another, rather than the industry making significant inroads in adding customers who have not had cellular phone service before. Considering that the market penetration is up to about 70 percent, this isn’t too surprising-and the carriers themselves are taking note.
In its annual report, Cingular Wireless L.L.C. estimated “that approximately 70 percent of industry gross additions during 2005 were formerly subscribers of another wireless carrier.
“If this condition continues, we expect competition could intensify and our subscriber growth could be increasingly dependent on reducing our churn rate,” Cingular concluded-and did manage to push its churn rate down to 1.9 percent in the first quarter, a record for the carrier.
Sprint Nextel Corp. echoed those competitive sentiments in its most recent quarterly report.
“We believe that wireless carriers increasingly must attract a great proportion of new customers from the existing customer bases of competitors rather than from first-time purchasers of wireless services,” the report noted. “Certain of our competitors have continued to increase their focus on customer retention efforts, which may make it harder for us to acquire new customers from these competitors.”
Trying to catch churning customers rather than wireless newbies also means that the remaining wireless neophytes probably aren’t a carrier’s most desired customers, Sprint Nextel admitted.
“The higher market penetration of wireless services may suggest that customers purchasing wireless services for the first time may, on average, have a lower credit rating than existing wireless users, which generally results in both a higher churn rate due to involuntary churn and in a higher bad debt expense,” the carrier said.
Bear Stearns wireless telecom analyst Phil Cusick noted that the declines in total churn for the industry mostly have been driven by very low postpaid churn, which is offsetting the higher churn that has come along with robust growth in prepaid. As growth within the industry shifts more toward prepaid, carriers are not likely to be able to sustain the kind of churn reductions that they have posted recently.
“If the balance continues to shift toward prepaid, which we think it will, then you’ll at least see a moderation in the [churn] declines,” Cusick said.
Additions from prepaid and wholesale or mobile virtual network operators accounted for 27 percent of adds by the four largest carriers last year, up from 19 percent in 2004, Cusick noted.
In addition, while carriers are pushing down the percentage rate of their churn, they are at the same time growing their customer bases-so the real numbers of customer that churn each year haven’t changed all that much. For example, Verizon Wireless had an average monthly churn rate of 1.8 percent for 2003, when its customer base grew from 32.5 million to 37.5 million; the carrier lost about 21.6 percent of its customer base to churn, or somewhere between 7 million and 8.1 million subscribers for the year. By 2005, Verizon Wireless had slashed its average monthly churn to 1.3 percent, or 15.6 percent of its customer base churned last year. But Verizon Wireless’ customer base grew by 7.5 million customers last year to end up at 51.3 million, so that percentage works out to fall between 6.8 million and 8 million churned customers-close to the number of customers that were churning from Verizon Wireless three years ago.
According to Compete Inc., Verizon Wireless and Sprint Nextel subscribers are most likely to consider switching carriers because the cost of their service is too high, whereas Cingular and T-Mobile USA Inc. customers tend to believe they’ll get better network quality if they select a different carrier.
“As loyal as people are, they’re always interested in what else is out there,” said Adam Guy, director of wireless practice for Compete.
Guy noted that with family plans becoming a larger portion of carriers’ subscriber base, the customer stickiness does help to lower churn-but not necessarily because customers actually feel loyal or connected to their carrier.
“That’s a form of loyalty,” he said. “But it’s not the form of loyalty you think of when you think about brand. We don’t see people feeling that way about wireless carriers.”
