DC Circuit: Verizon Can’t Try to Keep Customers

by on February 12, 2009 · 22 comments

briefcase full of cashOver the summer, I blogged about an FCC decision to ban Verizon’s practice of offering incentives to departing customers to get them to stay. Yesterday, the DC Circuit upheld that bad decision. When a customer of Verizon’s phone service decides to leave for a VOIP company, Verizon gets a notice that the number is being ported. When Verizon got notified that the customer was trying to leave, the company would offer her incentives such as “discounts and American Express reward cards” to stay.

This worked well for the customers, who got discounts if they stayed. It also worked well for Verizon, for whom it costs much more to find a replacement customer than to keep the current one. And it was really the best way to do so. If Verizon had given the incentives any time a customer threatened to leave, but didn’t start the process of doing so, then customers would just bluff to get the incentives. Verizon instead looked for a costly signal from the customer. And if Verizon had waited until after the port was already completed, it would cost the customer, Verizon, and the new carrier a lot of effort to switch back.

But the FCC banned Verizon’s efforts and yesterday the DC Circuit affirmed the Commission. I will follow with more details, once my summary of the case comes out in the March issue of Packets, the Center for Internet and Society’s publication summarizing important new internet cases. But for now, I should just note that the court hinted that the FCC’s reading of the statute it relied upon was a bit counterintuitive, but was compelled by Chevron v. NRDC to give the administrative agency great deference in its bad reading of the law. The court even noted that Verizon offered uncontroverted evidence “that continuation of its marketing program would generate $75–79 million in benefits for telephone customers over a five-year period.” Further, the court rejected Verizon’s First Amendment challenge, because the lower standard for commercial speech compelled the conclusion that Verizon’s sound marketing efforts didn’t deserve protection.

These precedents need to be revoked, or the growing administrative state will keep swallowing up more and more of our most important freedoms while preventing sensible and beneficial policies.

  • http://www.cs.princeton.edu/~tblee Tim Lee

    To be clear, the decision doesn't prohibit Verizon from offering customers incentives to stay. It only prohibits the offering of such incentives after another carrier, at the customer's request, has initiated the actual transfer process. If Verizon is allowed to launch a “retention effort” after the porting process has started, it has an incentive to drag its feet to give its marketing people more time to make their case. I'm not sure that's good for consumers, who have an interest in having the porting process go as quickly and smoothly as possible.

    I also don't understand why it should concern us that “customers would just bluff to get the incentives.” If “incentives” became ineffective, maybe Verizon would start charging all of its customers a uniform, lower price rather than forcing customers to jump through hoops and send “costly signals” in order to get discounts.

  • MikeRT

    The real issue there is that all a customer should have to do is tell them “stop, I'm not interested” and that's the end of it. If Verizon's marketing people don't shut up and let them go, that's entirely a different matter from them calling them up and offering $50 in immediate goodies and a discount if they choose to stay. The court should have made it clear that if Verizon is just interrupting them long enough to make the offer, it's valid.

  • http://www.openmarket.org/author/alex-harris/ AlexHarris

    Tim,

    I think there are perfectly good reasons for Verizon to offer incentives to departing customers to get them to stay rather than just lowering prices across-the-board. Their customers may be leaving because they're enticed by start-up offers from competitors (e.g. “Only $20 a month for your first six months!”). In a world in which it is much more costly to acquire a new customer than keep an old one (which, btw, is not true of classical perfectly competitive markets for pure commodities), leaving may not be an overall efficient solution. Verizon's scheme ensured that customers face countervailing incentives to the ones the competitor was offering.

    I've had different versions of this scenario happen to me. I have left cell phone carriers (after I was off-contract) because I was paying an artificially inflated monthly rate and my present carrier would not offer me a free phone, though a new carrier would. My cell phone company wouldn't try to woo me back if I just threatened, because then everyone would threaten. If, however, my carrier had tried to woo me back after I initiated the port request, things may have been worked out between us after all.

    I have also gotten credit card companies to offer me incentives to stay after threatening to cancel… but they put me through a few more hoops (I have to say I'm really sure I want to cancel a couple of times) before offering their best incentives, to ramp up the cost of the signal and try to make sure I'm not bluffing.

  • http://ditzler.blogspot.com Wyatt Ditzler

    Wasn't the original complaint that Verizon was dragging its feet on the porting in efforts to save the customer? Basically holding up the process in an attempt to regain the customer, beyond the typical time it should have taken the porting to be completed?

  • http://bennett.com/blog Richard Bennett

    The right to bluff is a fundamental, and the simply preserved it. If Verizon or any other phone company wants to keep its customers from switching, it will need to treat them right 365 days a year, not just during the four days they have to effectuate a switchover. Allowing phone companies to refrain from making good price and service offers until a switchover is active shifts the balance of power too far in the carrier's favor.

    The FCC and the court did the right thing here. See my blog post on the subject: http://bennett.com/blog/2009/02/court-upholds-f

  • http://www.openmarket.org/author/alex-harris/ AlexHarris

    “The right to bluff is a fundamental.”

    Life, liberty, property, speech, privacy, due process, religion… and… faking out your VOIP provider?

    Of course you can bluff, but you have no positive right that the company will believe you and offer you incentives. It's better for everyone if they don't have to, but can instead give incentives to only those who are actually going to leave, as explained above.

  • http://bennett.com/blog Richard Bennett

    So the there's a right not to be bluffed that trumps the right to bluff? This is entitlement creep if I've ever seen it.

    You fail to make a case for the social benefits of screwing the customer until they're so frustrated they leave, and only then relenting, but it would be amusing to see you try.

    Incidentally, this case wasn't about VoIP, it was about POTS.

  • http://www.openmarket.org/author/alex-harris/ AlexHarris

    I don't think I ever said Verizon has a right to not be bluffed. I think that speaking of “rights” in this context is a little ridiculous… except for speech rights. Verizon has a right to be free from government preventing their attempts to woo customers by offering them incentives. Of course, the company has no positive “right not to be bluffed” – anyone who wants can try; there's just no guarantee that they'll be successful.

    The second paragraph of my post and my response to Tim explain why it is more beneficial for everyone involved if Verizon can focus its marketing efforts on customers who are actually about to leave. As the court pointed out, Verizon offered uncontroverted evidence “that continuation of its marketing program would generate $75–79 million in benefits for telephone customers over a five-year period.”

  • http://bennett.com/blog Richard Bennett

    Here's what you said: “This worked well for the customers, who got discounts if they stayed. It also worked well for Verizon, for whom it costs much more to find a replacement customer than to keep the current one. And it was really the best way to do so. If Verizon had given the incentives any time a customer threatened to leave, but didn’t start the process of doing so, then customers would just bluff to get the incentives. Verizon instead looked for a costly signal from the customer.”

    You seem to imply that it's bad for customers to “simply bluff” the telco, and you assert without evidence that “it was really the best way to [keep the customer in the fold]“, but you acknowledge that the disconnect notice is a “costly signal.” So on balance, you seem to be arguing that there's some social good in requiring the customer to issue a “costly signal” rather than the “less costly signal” of simply calling the company and complaining about the price, service, phone selection, or whatever.

    Why is it the case that the consumer most bear the entire burden of the “costly signal?” Consumers have to spend entirely too much time these days correcting billing errors, upgrading software, and trouble-shooting POS consumer systems that don't do what they're supposed to do. The market is going to work best when firms compete for the consumer dollar and act on low-cost signals to pro-actively improve their service, and that's the social good.

    To put it another way, restaurants respond to customers who create a commotion because they've had to wait too long for their food or didn't get what they ordered. Should customers be required to break windows to get good service, or should it be the norm?

  • http://www.openmarket.org/author/alex-harris/ AlexHarris

    In general, it's better for everyone if Verizon can separate the sheep (customers who are bluffing) from the goats (customers who are serious). If the company can't, it encourages the company to just stop offering incentives altogether. That's why I couldn't get a new cell phone and may be why you couldn't get an incentive from your satellite company. (Note also that the signal doesn't really cost the goats, the serious customers, any more than they're paying anyway. They were going to leave and, as part of that, go through the porting process anyway. Now, if Verizon wants to woo them back, it can only do so once the process is already completed, costs have been sunk, and even more costs have to be incurred to go back.)

    Now, the “they should just provide a better service for everyone” argument is what Tim and I were discussing. It is an argument against offering incentives at all. Rather, Tim and you say, Verizon should just put that money into lowering prices or improving service. Above, I argue to Tim that incentives are actually efficient in a market where it is more costly to get a new customer than retain an old one and where competitors, therefore, offer start-up incentives.

  • http://bennett.com/blog Richard Bennett

    It's extremely inconvenient to change telcos or cell phone carriers, just as it's inconvenient to win them back after they've switched, so it's actually in everyone's interest for service to be good enough that customers aren't tempted to switch carriers.

    I think if you examine the behavior of customers who do switch, you'll find a history of resolved problems, complaints about phones and billing, and that sort of thing. So what's actually happening is that the carriers are choosing to ignore these “signals” today, just as they did when they were content they had the only phone company in town. It's a different world now, and they can't just sit back and blow off customer complaints because we can and will walk.

    Like it or not, that's the law of the land today, and the carriers had best reform their ways if they're going to prosper in this business climate.

  • http://bennett.com/blog Richard Bennett

    It's extremely inconvenient to change telcos or cell phone carriers, just as it's inconvenient to win customers back after they've switched, so it's actually in everyone's interest for service to be good enough that customers aren't tempted to switch carriers.

    I think if you examine the behavior of customers who do switch, you'll find a history of resolved problems, complaints about phones and billing, and that sort of thing. So what's actually happening is that the carriers are choosing to ignore these “signals” today, just as they did when they were content they had the only phone company in town. It's a different world now, and they can't just sit back and blow off customer complaints because we can and will walk.

    Like it or not, that's the law of the land today, and the carriers had best reform their ways if they're going to prosper in this business climate.

  • http://bennett.com/blog Richard Bennett

    It's extremely inconvenient to change telcos or cell phone carriers, just as it's inconvenient to win customers back after they've switched, so it's actually in everyone's interest for service to be good enough that customers aren't tempted to switch carriers.

    I think if you examine the behavior of customers who do switch, you'll find a history of resolved problems, complaints about phones and billing, and that sort of thing. So what's actually happening is that the carriers are choosing to ignore these “signals” today, just as they did when they were content they had the only phone company in town. It's a different world now, and they can't just sit back and blow off customer complaints because we can and will walk.

    Like it or not, that's the law of the land today, and the carriers had best reform their ways if they're going to prosper in this business climate.

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