Editor’s note: Russ McGuire is the online director of Business Reform Magazine. Each issue of Business Reform features practical advice on operating successfully in business while glorifying God.
The reaction I got from last week’s column on wireless number portability surprised me. Clearly there are lots more folks passionate about the topic than I thought. I received many e-mails and was able to respond individually to most of them. However, several valid points were made and a number of misconceptions were uncovered in these discussions. Therefore, I wanted to bring all of these points to light in this broader forum.
You can read last week’s column on our website. I’ve also set up a survey to find out how big of an issue wireless number portability really is. You can find both here.
The comments that I received generally fall into four categories:
- “You’re wrong. I’m desperate for portability because I’m locked into a lousy plan from a lousy provider.”
- “Your math is wrong. It won’t cost that much for carriers to implement number portability.”
- “This is just like mobile number portability in Europe or 1-800 portability here in the U.S. We need it!”
- “We need number portability so that I can cancel my landline phone without losing the number.”
I’ll deal with each of these in turn.
“You’re wrong. I’m locked into a lousy provider.”
Some of you explained your situation to me. In some of the cases, you’re absolutely right – you are locked in to a lousy carrier and without number portability, it’s impractical for you to change carriers. With number portability, you could change carriers and hopefully get a better deal. In these cases, your decision is simply the consideration of how much it will cost you to change (in terms of dollars spent changing, man hours invested in the change, and lost revenue due to the change) compared to the value of making a change (cost savings from a better plan, value of improved service). For some of you, the cost is so high (especially in potential lost revenue), without number portability, that it’s impossible to make the change. In this case, I imagine that you’d be willing to pay an extra fee to move your number, but today you don’t have that option.
However, some of the folks who claimed that they were desperate for number portability, I believe, were just confused about what number portability will do for them.
First of all, let’s be honest – there are no good cellular providers out there. I received messages from folks that represented almost every single carrier and they all said “my current provider stinks.” So – don’t fool yourselves – switching carriers isn’t going to get you better service. In fact, 30% of all cellular customers switched carriers last year. I doubt there’s another industry with churn that high. And yet, none of the carriers gained significant share. The customers merely moved from one bad provider to another bad provider. If there were a carrier out there with exceptional service at a reasonable price, the bulk of those 30% that are free to switch would be switching to them.
However, we can hope, can’t we? Today, virtually all of the carriers are competing on price. Nextel has a feature advantage in push-to-talk that the other carriers are struggling to match. Everyone else has a pure commodity product. We can hope that one carrier will try to differentiate itself on the basis of quality of service (both human and technical) and, by doing so, redefine the rules of competition. From what I’ve heard this week, there’s a clear need for improved service.
There’s another important lesson that I believe the carriers need to learn. They are encouraging their customers to churn. They are offering great plans to new customers, but doing nothing proactive to retain customers. Existing customers get stuck with lousy plans, are fed up with lousy service, and as soon as they can (which for some, isn’t until number portability happens) jump to a new carrier with a very attractive plan. The providers are probably fearful of cannibalizing their own revenue stream, but this is a very short-sighted perspective, and if churn is really as expensive as they claim, it’s downright foolish. By forcing a customer to stay on a $50/month plan instead of automatically switching them to a better $40/month plan, they’ll lose that customer in 6 months when their contract runs out. They avoid losing $60 ($10 over 6 months) in revenues, but end up eating the $250 (or whatever it really is) cost of acquiring the new customer they’ll need to replace the one they lost (and oh, by the way, the new customer will get the $40 plan…)
However, worse than the delusion about there actually being a better carrier out there to switch to is the misperception about what number portability actually accomplishes. If I switch my local telephone service from the Bell monopoly to a competitive provider, I can take advantage of number portability to keep my same phone number. In fact, in almost all cases, I’ll keep my same phone line, literally. My new provider will lease from Bell the wire that Bell owns running to my house. The signal quality and coverage are identical to what I’m used to. This is NOT the case with wireless. Unlike with wireline, wireless incumbents are not forced to lease their assets (spectrum, towers, and antennae) to competitors. So, in most cases, when you switch cellular providers, you are actually switching entire infrastructures. Your service will be provided from different towers and, in many cases, you’ll need a new telephone. The number portability regulation ONLY affects the telephone number. With number portability, you only get to keep the telephone number. You still need to buy a new phone and you’ll get your cellular coverage from a new set of towers. For those of you that are locked into a provider because it is the only one whose network adequately covers the territory that you need, number portability will do NOTHING to change that.
“Your math is wrong.”
A number of people were kind enough to explain how my numbers couldn’t possibly be right. And they’re right, my numbers are wrong. I don’t know if they’re too high or too low, but I’m sure they can’t be perfectly accurate. My main point was to bring some attention to the magnitude of the issue.
I used two sets of numbers to come up with the cost of number portability to the industry. One was the cost of churn, which works out to $250 or so per churning customer. Some readers claimed that number is merely the carriers’ marketing budget divided by the number churning. If more churn, the marketing budget doesn’t go up, so the cost per churning customer comes down. It isn’t quite that simple, but close enough. However, I don’t believe the $250 is all marketing. There are some costs in switching a customer (remember these companies are largely unionized), and there’s usually some promotional give-away for new customers – maybe a discount on a new phone or free minutes or something else of real value. If number portability really did spark more competition, these costs would almost definitely go up in the scramble for subscribers.
The other number is a bit harder to defend with logic. The $1 billion implementation cost number came from an industry research firm that seemed critical of the carriers and supportive of number portability. The executive summary of the report (all I could read for free) had the tone of “it’s only a billion”, implying that many people expect it to be higher. How could this possibly cost a billion dollars to implement and another half billion per year to maintain? Consider two realities – regulators are involved who will expect reams of data and reports, and these carriers are not exactly nimble innovators. It takes big bureaucracies to act like a Bell company, and these guys have them. These companies don’t do anything without spending a year or so getting “Telcordia” certification (Telcordia used to be Bellcore, if that means anything to you). Telcordia is expensive to work with, both in terms of the fees they charge and the man hours required to interact with them. In the end, I wouldn’t be surprised if the technology required for number portability ends up being less than 20% of the cost of implementation – the rest is tied up in inefficiencies that are endemic in big regulated industries.
So, maybe it’s not a billion dollars. Maybe it’s two billion, or maybe it’s half a billion. Maybe it’s not $250 per subscriber, maybe it’s $300 or maybe it’s $100 – in any case, these are big numbers.
And these companies are already having to swallow big numbers. Several of the major wireless carriers don’t report their financials because they are wholly owned by parent companies. However, we can look at Cingular and AT&T Wireless as representative of the challenge.
Cingular doesn’t report Net Income because they are wholly owned by BellSouth and SBC. But they are kind enough to provide plenty of scary numbers nonetheless. Over the past 4 quarters, Cingular has generated roughly $2.5B in Operating Income (Net Income would be less). However, over that same timeframe, Cingular spent $3.9B in new capital investments in upgrading their network. These costs are depreciated over time, so they aren’t subtracted out to get to the Operating Income. In other words, the company spent more than they made. That means they are going into debt. How far in debt are they? Their balance sheet shows $12.6B in debt. If they didn’t have to pay interest on that debt and if they didn’t need to make any more investment in their network, it would still take 5 years at their current Operating Income level to pay off that debt. But of course, they are actually increasing the debt rather than working it down.
AT&T Wireless is actually in worse shape. In 2002, the company lost somewhere between $200 million and $2.3 billion depending on which of their losses you want to count. Meanwhile, they have $11B in debt. The good news is that they turned a profit in the first quarter of this year, but that profit (Net Income of $142M) was a small fraction of what they spent on capital expenditures ($501M).
Bottom line, Number Portability represents a big cost (we can argue how big) to an industry that can’t afford more big costs…
“It’s just like Europe or 1-800”
Europe has been implementing number portability for a year or so. Some countries (e.g. Britain) started earlier than others. I did some searching to try to find some definitive results from European mobile number portability and found virtually nothing. A couple of mobile operators’ quarterly financial reports claimed that portability hadn’t hurt them, and a bunch of articles written before the fact predicted that portability would severely hurt the carriers. My only assumption is that number portability hasn’t really had that much of an impact in Europe.
But Europe is a very different place from the United States. First of all, in case you hadn’t noticed, it’s split into a bunch of different countries, many of which speak different languages and have different cultures. Most carriers are limited to a single country, or maybe a patchwork of different subsidiaries operating in different countries. That’s the bad news. But the good news is that Europe settled on a single standard for digital mobile communications. So, even though you may be traversing many countries and many carriers in the course of a business trip, your cell phone works everywhere. And, from a competitive perspective, if you ever wanted to change providers, even before number portability, the barrier to change was much lower than the U.S. because you could keep the same phone – you wouldn’t need to learn how to use a new one, wouldn’t need to reprogram it to your preferences etc. The end result was that, even before number portability, European mobile customers had a fairly competitive market, with operators competing not just on price, but also on service quality.
The greatest barrier in the U.S. to achieving the same type of competitive market as Europe is not number portability, but it is the fact that different carriers have chosen and implemented different digital standards. I just switched wireless carriers. Yes, I lost my telephone number, but I also had to get a new phone. I still haven’t figured out how to get it to do the things my old phone did. I certainly haven’t gotten around to programming in all of my numbers. That will take months. To me, the phone issue was a bigger barrier to switching than the number issue. I realize that’s not the case for everyone.
Additionally, the fact that we have a small number of nationwide carriers, versus Europe where there are dozens of carriers, each covering a smaller geographic area, creates a very different operational and competitive environment. We will never duplicate that here.
Comparing wireless number portability to 1-800 number portability is just as illogical. Ten years ago, when 1-800 portability was implemented, AT&T owned the market. Although their long distance market share had plummeted from 90+% to around 60%, they had managed to hold onto most of their 800 customers because the customer would lose their cherished number in which they’d invested millions of dollars to advertise. Since there wasn’t a competitive market, the dominant provider (AT&T) could hold their customers hostage to exorbitant prices, poor service, and lagging features. As soon as 1-800 number portability was implemented, not only was there an immediate impact on customers, but literally hundreds of new competitors jumped into the market. Customers benefited tremendously from the new competition. AT&T had to make significant concessions to hold onto the customers that they kept, but clearly lost many customers to new competitors.
Today’s wireless market is very different. There is no dominant provider. There are several, roughly equal competitors. This relatively high level of competition results in healthy price competition and the wireless industry has seen significantly more feature introductions than either wireline long distance or local industries. Yes, some customers are still held captive because there isn’t number portability, and yes, these customers are suffering for it. But it is not nearly as widespread as it was in the early 1990s. And even if number portability were implemented this year, we would not have hundreds of new competitors entering the market. The spectrum required to compete is already taken. New entrants have no way to get into the market. Therefore, we would not see the types of dramatic changes in wireless that we saw in toll free services ten years ago.
There are two interesting observations from the 1-800 number portability analogy. First, the implementation of portability was incredibly complex. A centralized database administrator was selected by the FCC to manage the massive repository of call routing information for every single toll free number. Each carrier had to synchronize their network routing systems with this centralized system. Not every carrier could provide updates to that database. Instead, a subset of carriers paid the fees and became certified as responsible organizations (or “resp orgs” as they were called). Smaller carriers had to buy “resp org” service from larger carriers who then had to pass updates along to the centralized database which was administered under a contract from the FCC. Are you starting to get a sense for why it may actually cost a billion dollars to implement number portability? The second interesting observation is that, once the toll free market was freed through number portability, it exploded. There was so much pent up demand for toll free numbers (at a reasonable price) that we now have 800, 888, 877 and 866 toll free numbers.
“I want to port my landline number”
OK, I cheated by saving the easiest one for last. The wireless number portability regulations do NOT include portability between wireline and wireless services. Even though number portability is already in place for wireline services, and even if number portability is enforced for wireless services, you will not be able to cancel your home phone service and keep the number for use on your cell phone. The FCC is saving that for some future regulation.
Whew… this is a big topic with lots of implications worth debating. But in the end, I can boil it down to these points:
- We already have a competitive wireless industry.
- Those competitors are primarily competing on price, but service quality is poor.
- Therefore, a large number of customers are switching providers often, playing the price game and hoping for better service.
- Number portability would not dramatically change the competitive dynamics in the industry, we’d still have the same competitors with roughly the same market share they have today.
- However, number portability would cost lots of money to implement and operate.
- And none of the wireless carriers are financially healthy enough to easily bear that cost.
- But, there are clearly some customers who are in significant pain and desperately want portability to solve their problems.
- Remember to take our survey to let us know where you fit in the pain spectrum.
Russ McGuire is Online Director for Business Reform. Prior to joining Business
Reform, Mr. McGuire spent over twenty years in technology industries, performing various roles from writing mission critical software for the nuclear power and defense industries to developing core business strategies in the telecom industry. Mr. McGuire is currently focused on helping businesspeople apply God’s eternal truths to their real-world business challenges through Business Reform’s online services. He can be reached at RMcGuire@businessreform.com.