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With Today’s Smartphones, Carrier Loyalty Is Fleeting

High-tech smartphone users are among the least likely to stick with their carrier, and 31 percent of U.S. consumers are ready to switch wireless providers for better or improved services, according to a recent Nokia Siemens Networks survey. Even with the rising cost of early termination fees, carrier loyalty is fragile at best, with only 17 percent of the survey participants claiming that their current network provider is the only carrier they’d consider using. In light of the latest round of rumors that suppliers are gearing up to build a Verizon (s vz) iPhone, the U.S. market may get its biggest chance yet to take a closer, firsthand look at carrier loyalty.

Prior to the rise of smartphones, carrier loyalty was tied more to network coverage — and for many it still is. Consumers don’t want to worry about signal strength or proximity to a cellular tower in order to phone home; at their most basic level, phones have to work for the primary purpose. In the early days of cellular, there wasn’t much difference between most voice-only handsets. Perhaps there were size and fashion considerations, or more interest in devices that offered a wider range of compatible accessories, but until a half-dozen years ago, phones were just phones. Then along came the smartphone, and with it, more device differentiations and a greater range of handset capabilities.

I’d argue that in the present day, choice of device is nearly as important to carrier choice as the network itself; indeed, for some “power users” of smartphones, the device itself may be even more important. Apple’s iPhone (s aapl) is a prime example of this concept. At one point, 73 percent of AT&T’s quarterly new subscribers activated iPhones. These new customers had ample opportunity to switch from their current carrier to AT&T (s t) at any point prior to that, but it took a hot “must have” smartphone to make the move. Yesterday’s report from Credit Suisse lends timely credence to the importance that devices have in choosing a carrier: The investment bank estimates that 23 percent of current AT&T iPhone owners would switch to Verizon if the carrier indeed offers the iPhone, which I expect to happen in 2011.

The carriers realize that loyalty isn’t what it used to be in this age of pocketable computers. To that end, all of them have been upgrading their services with faster data networks and new cloud-friendly products. Now that solid smartphones are available on all the major U.S. networks, however, the latest loyalty-enhancer is a stick, rather than a carrot: higher contract termination fees. Verizon took the first step in December of last year, doubling the cost to get of a contract to $350 from $175 on smartphones. AT&T followed by boosting its Early Termination Fee to $325, adding a higher barrier for consumers who want to leave the carrier. Increased hardware subsidy costs are often the given reason for the higher fees, but facts are facts: Apple’s average selling price (ASP) of an iPhone, for example, still averages around $600 per unit, and that amount hasn’t varied much before or after the increased fees. If the consumer price of an iPhone hasn’t changed and the ASP hasn’t changed, I don’t see how the carriers are paying more to subsidize the hardware.

In terms of customer loyalty, my advice to carriers would be pretty simple. Don’t strengthen artificial barriers for customers to leave your network by increasing ETF costs. Instead, let your service speak for itself by providing great coverage at reasonable prices. If you can supplement the network with desirable value-add services, (again at reasonable prices) make it happen. And continue to work towards a solid lineup of hot devices that you don’t need to fill with unwanted crapware. Customers are becoming more tech-savvy all the time, and it’s almost offensive to think you know what they want better than they do themselves.

Related content from GigaOM Pro (sub req’d):

Why Apple Should Choose Sprint Before Verizon Wireless
How AT&T Will Deal With iPad Data Traffic
To Ship or Not to Ship — Product Launch in the Smartphone Era

7 Responses to “With Today’s Smartphones, Carrier Loyalty Is Fleeting”

  1. “Don’t strengthen artificial barriers for customers to leave your network by increasing ETF costs.”

    That’s what it comes down to in the end – free markets. In the end consumers drive free markets while business tends to distrust free markets. To have free markets consumers must have choice and the ability to easily (cheaply) act on informed decisions.

  2. I think your article is both timely and spot on.

    On Sept 13th, Om Malik wrote how, in this era of Android and iOS, he has stuck with T-Mobile and his Blackberry.

    Said Om: “…the biggest reason for me is the UMA technology on my T-Mobile Blackberry Bold.”

    UMA – a single feature which is creating incredible loyalty for T-Mobile.

    More than Om’s article, scroll down read the comments posted by users:
    – “UMA for us is a godsend.”
    – “I agree that [UMA] is a great differentiator…”
    – “I rely on UMA to keep me connected…”
    – “I love UMA on my Nokia phone…”

    I think your last paragraph sums it up great:

    “In terms of customer loyalty, my advice to carriers would be pretty simple. …let your service speak for itself by providing great coverage at a reasonable price. If you can supplement the network with desirable value-add services, make it happen.”

    I think UMA qualifies as a desirable value-add service. Plus it goes to providing great coverage. People are definitely passionate about it.

    By the way, Kineto is a supplier of UMA technology. I can’t talk to T-Mobile’s position with regard to UMA on Android (the theme of Om’s original story). I can say that Kineto announced the availability of its Smart Wi-Fi App (aka UMA) for Android 2.2 just this week.

  3. OhhJohnny

    There are some interesting points that this article brings up. I think we have kind of moved back to the coverage as the main factor again. With the iPhone and other smartphones (but mainly the iPhone), device lust became a primary factor. But now, every major carrier has a high-end smartphone that is pretty darn good.

    The iPhone 4, Droid X, EVO 4G, G2 or any of the Samsung Galaxy devices are really good smartphones that should make anyone happy for a while. There are differences that get endlessly debated in tech blogs, but for the average person, these are all good enough.

    That brings us back to carriers – customers can now get a great device on any of them, so now it comes down to service, coverage and cost. I think that’s actually a good thing.

    As for the raised ETFs, I don’t think it’s that horrible. The carriers are throwing more subsidies at these devices, so the raised fee kind of makes sense. As for the ASP of the iPhone, you forget to mention that AT&T has allowed iPhone owners to upgrade early with nearly every generation of the device, thus making the initial return on the subsidy less.

  4. It’s a bit like the old soapbox.

    If you’re in a crowd, and you want to see what’s happening, standing on a soapbox will give you a view.

    However, if everyone stands on a soapbox, then the soapbox becomes useless.

    The carriers are locking customers into 2-year contracts, with the cost of the handset spread out over that period of time. Is it worth it? Such lock-in is like the soapbox.

    When a cellular carrier like Verizon Wireless starts interfering with the fabric of Android, adding its own walled-garden services, changing the default search to Bing, adding crapware and adware that nobody wants, it really serves as a disincentive to use that network.

    • OhhJohnny

      What about when Google uses its influence on the platform to force Motorola to not use Skyhook positioning, as a lawsuit alleges? Doesn’t that mess with the fabric of Android?

      And isn’t the fabric of Android that it’s open for handset makers and carriers to do what they want? Google approved what Verizon did because it allowed the Android Market and Gmail on the Fascinate.

  5. Loyalty is a two way street. If you offer new customers a better deal than your present customers, and all the carriers do, then why should the customer be loyal. I switched from Sprint to VZW because of free phone vs. $150 “loyal customer” deal.
    I definitely won’t be staying with VZW because they screw with the aGPS on Palm Pre Plus phones and I’m still waiting 4 months for my company discount that should be immediate.
    I’ll probably head back to Sprint which is cheaper, don’t play games with aGPS, etc.