UBS: Number portability won’t add up to churn

While some pundits are predicting massive customer churn immediately following the Nov. 24 implementation of wireless number portability, financial firm UBS Warburg is painting a far different picture, arguing that the wireless landscape will in fact suffer little upheaval in the weeks ahead.

During an investment research conference call dubbed “Wireless Local Number Portability (LNP)—A Churn for the Worse?,” UBS wireless telecom services analyst Colette Fleming last week predicted that LNP will not greatly impact customer churn totals during the remaining weeks of 2003. She said wireless industry churn rates have materially declined throughout the year as carriers have focused more of their energies on customer retention efforts, and that regardless of number portability, the fourth quarter has historically represented a rise in customer churn stemming from extenuating seasonal factors. 

UBS’s findings focus on what Fleming called “good-credit, postpaid customers” and subtract prepaid customers and the like, noting that involuntary churn—customers who are dropped by carriers for failing to pay their monthly bill, for example—currently accounts for 30% of all churn and is not linked to LNP. By contrast, 75% of what Fleming called “good customers” are currently under contract, leaving only a quarter of premium consumers at risk once portability is in effect.

Following an industrywide churn average of 2.4% in 2003, UBS predicts that churn could reach levels as high as 2.7% in 2004, but does not foresee an exponential increase—to break even the 3% barrier, for example, voluntary churn would need to climb to 40%. “In order to see rates that are 3% or higher, you have to assume roughly 100% of [customers] not under contract will churn and a pretty big increase in customers that are under contract,” Fleming said. “That’s why we don’t believe that overall industry churn rates for 2004 above 3% are reasonable.”

UBS cited four dominant factors that will help wireless carriers counteract LNP-based churn in the months ahead: A benign pricing environment, an improved focus on customer service and retention, bundled services which make it more difficult for customers to switch carriers, and the industrywide prevalence of two-year service contracts. According to Fleming, of the six largest national carriers Verizon Wireless will benefit most from number portability—Nextel Communications, Sprint PCS and T-Mobile will remain neutral, and AT&T Wireless and Cingular will experience the most significant customer losses.

On the enterprise side, Fleming predicted that carriers would experience a greater impact from decreased ARPU than customer churn. “The bargaining power has shifted to the corporations from the carriers,” she said, adding that for operators to keep their existing enterprise customers, they must grow more competitive on pricing. Fleming said that carriers with large embedded bases of enterprise users would face a slow ARPU drain moving forward, singling out AT&T Wireless as a likely example: “We call this a slow ARPU drain, because contract renewals are gradual and RFP processes tend to be a little bit long.”

Fleming said quality of service and network coverage are also critical to enterprise satisfaction. “We don’t think price is going to be the sole factor, but it will give corporations leverage,” she said. Still, Fleming said she doubts that carriers will suffer much enterprise churn immediately following the Nov. 24 LNP launch, as corporate customers will instead wait to see that the portability process is proceeding smoothly before risking possible interruptions to their service.

On Nov. 10, the FCC also mandated number portability from wireline to wireless numbers (and vice versa), but UBS telecom wireline analyst John Hodulik said portability represents only an “incremental negative” for wireline carriers. “It’s not a big deal because we find it hard to pinpoint the target market for the service,” he said. “Younger, single people that are most likely to cut the cord have already done so, or they are so wedded to their wireless number that it’s already more important than their wireline number.”

Conversely, Hodulik said families would continue to keep their existing wireline service regardless of wireline-to-wireless portability because of the number of family members sharing landline services, in addition to factors like household security.