The Sting in the Long Tail

Cingular reported its’ second quarter results to nearly universal applause with a near tripling of net profits to $540m from $147m, but amongst all the back slapping there are a few dark clouds appearing on the horizon.

First towards the end of the year, Cingular are to have finished all the GSM network integration between the old SBC/BellSouth/AT&T properties. This basically involves two steps:

• Re-farming of spectrum and integrating sites – most of the work for this has been completed with 12% of sites yet to be integrated. The GSM base will have a much better network as a result of this and should be happy, also network costs will be reduced; and
• Consolidating IT platforms – again, costs are reduced as there is only one platform, but this time there will be unhappy customers.

Most of the customers who have not currently moved are “hold-outs” who do not want to move onto the new Cingular price-plans, despite offers of discounted phones. The potential problem is that these people will chose another carrier for their service.

Second, Cingular are going to start turning off its’ old TDMA network again this is great in terms of released expensive, scarce spectrum, reducing network costs, shutting down legacy IT platforms and generally making customer support easier (and thereby cheaper) as complexity (and thereby choice) is taken out of the overall architecture. Cingular reported that the TDMA network has 4.7m customers (down 1.2m quarter-on-quarter) who represent 8% of total base of 2% of call volume. The spectrum and network & IT costs supporting this base will be a lot more than 2%. In other words, economically it is a completely rational decision to close the network.

The problem for Cingular is the noise or negative publicity that these technology “hold-outs” with create for the company. Several AT&T customers in the Seattle area have bandied together to launch a class action suit. I suspect there will be further noise as people are forced onto the “new” Cingular plans. As James Enck points out customer service woes spread really quickly on the jungle grapevine. I would add to this that no-one hates it more when the big man is perceived to pushing around the little man.

I think Cingular are also doing slightly strange things by sending out letters to customers where service is marginally profitable because of their roaming charges. In the USA, no network has 100% coverage and they make up the coverage with roaming agreements with other players. All the companies now sell national plans which profitability is dependant upon the amount of non-roaming minutes consumed. Although Cingular claims this affects only 1% of its’ base (over 500k customers) it has a much bigger potential to boomerang: very few customers understand the concept of roaming – the phone has service they use it, they do not care about the underlying network. I would guess a lot of these roaming problems fall into three categories:

• someone who lives on the edge of coverage and is for instance working in an out of coverage area and therefore roaming a lot;
• someone who has given the phone to a family member eg child on a family plan who lives away from home (at a University for instance) ; or
• a company who has several branches some on-coverage or some off-coverage have given phones to members of staff in both areas.

Here the potential is for the loss of multiple accounts not just the one who is creating the roaming issue. In my opinion, roaming costs should be used as a feedback back into the network design and spectrum acquisition loop to improve coverage. Cingular here is tacitly implying that they will never aim for 100% coverage. This is a dangerous admission for a cellular company to admit.

The CFO of Cingular admitted yesterday that the record low churn figure may increase short term as these issues are worked out. The next problem that Cingular will start to face that the KPIs will not increase dramatically as in the past. Wall Street Analysts will start to compare closely the Cingular figures with Verizon Wireless (VZW) and this is the huge problem looming for Cingular. The business even after integration does not look as profitable as VZW. Cingular seem determined to hold onto the label “largest network” especially from a customer base point of view. This has led to a large number of reseller (or MVNO) additions which are just not as profitable as Retail post-paid customers and they have higher churn.

In my opinion, the key business metrics are absolute cashflow and return on capital and I expect that VZW will continue to lead Cingular Wireless for a lot longer to come.