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