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AT&T Churn Rate Offers Lesson
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July 23, 2010

AT&T Churn Rate Offers Lesson

By Gary Kim, Contributing Editor

There's an important statistic to be gleaned from AT&T's (News - Alert) second-quarter financial report.  AT&T's churn rate fell to 1.29 percent from 1.48 percent a year earlier, with postpaid defections falling to 1.01 percent.

What is interesting about the impressively low churn is the amount of "bad press" AT&T gets about dropped calls and "no or weak signal" issues. If real customers were as bothered as one might think, based on all those reports, the low churn means that despite those issues, customers are not deserting. 

Keep in mind that contract churn rates for many types of communications services are in the three-percent-per-month range. That essentially means that nearly 100 percent of a service providers customer base has to be completely refreshed about every three years. AT&T's current churn means that the firm has to replace nearly 100 percent of its customer base about every seven to eight years. That is a meaningfully long "refresh" cycle, in this business. 

The low churn also contradicts the conventional wisdom that "unhappy" customers will leave, while "happy" customers will stay. Perhaps that is generally true. But barriers to switching seem to be quite high in the mobile industry, as they mostly are in the multi-channel video entertainment business. To be sure, cable operators, who once had nearly 100-percent market share in that business, are gradually ceding share to satellite and telco providers. But it is a grudging, hard fought, slow shift. 

Some will say the existence of contracts is one reason the churn rate is not higher. That is true. Family plans also are a barrier to switching behavior. But that is precisely the point. 

The "lesson" here, though many will not like it, is that customers can bear quite a bit of product "imperfection" without bolting, if the value proposition is high enough and if suitable substitute products are unavailable. To be blunt, even customers who say they are "unhappy" will put up with quite a lot of "insult" (real or imagined) in the absence of reasonably workable alternatives. 

Some predict the growing popularity of Android (News - Alert) smartphones, plus the eventual offering of the iPhone on at least one additional U.S. carrier could provide the impetus for more switching behavior. It is more the magnitude of any such churn that is subject to greater variance of opinion.

Some will argue that Verizon (News - Alert) Wireless second-quarter 2010 performance suggests that carrier "does not need" to sell the iPhone to keep pace with AT&T. The real test will only come if Verizon does get rights to sell the iPhone in 2011. One can argue that some amount of iPhone demand will switch to T-Mobile or Sprint (News - Alert) Nextel, should either of those two carriers can get the iPhone as part of their device portfolio. 

But the clearest market test would come if Verizon is designated the second provider in the U.S. market, since it is  Verizon which has the biggest market share, and frequently gets high marks for network quality, which obviously has been AT&T's Achilles Heel. 

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Stefania Viscusi

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