Winback Wars: The Politics of Customer Retention

by on February 12, 2008 · 4 comments

Cable and telecom operators have long fought like cats and dogs in the political marketplace. And now that they are competing more intensely for customers in the real marketplace, we can expect relations between the two camps to grow even more acrimonious inside the Beltway.

Case in point: Yesterday, cable operators Bright House, Comcast, and Time Warner filed a complaint at the Federal Communications Commission (FCC) alleging that telecom giant Verizon has been offering “unlawful inducements to customers” in an effort to retain those customers looking to switch over to cable-based voice offerings. The cable companies want to FCC to force Verizon to halt those “winback” tactics which take place before a customer switches over. And the cable operators also want the FCC to award damages based on past harm supposedly done to them.

It’s an example of just how cut-throat the marketplace competition has become between the two sectors recently. As Cynthia Brumfield of IP Democracy points out, telecom operators have been hemorrhaging customers in recent years and cable operators have been the primary recipient of those telco-defectors. As Cynthia notes:

For years now, Verizon has lost around one million access lines per quarter, due in part to mobile phone substitution and competition in the enterprise market. But cable accounts for at least a third to one half of these lost access lines, with Verizon losing around 400,000 to 500,000 residential lines each quarter. So, it’s easy to see why Verizon is… fighting tooth and nail to keep customers on the network. Verizon is waging war with cable over VoIP customers.

Indeed, telecom operators are scrambling to keep up with the competition and increasingly resorting to hard-nosed tactics to retain or win back their customers. But the new cable industry complaint alleges that they may have gone too far in trying to keep their old customers.

First, a bit of background is in order. The Telecommunications Act of 1996 required that the FCC implement a variety of local competition rules governing how incumbent local telephone companies would interconnect their networks with competitors, or even share elements of their networks with rivals. Among those rules were local number portability (LNP) regulations, which gave consumers the right to take their old phone numbers with them if they switched to a new carrier. Those regs also specified how incumbent operators would port over those numbers to a rival operator. They even govern when incumbent telephone companies could make their pitch to win back customers (generally speaking, after those customers have already left). These LNP regulations are at the heart of the dispute between the cable operators and Verizon.

The cable operators argue that–in violation of the FCC’s LNP regulations–Verizon has taken advantage of the porting window to encourage customers to remain with them in two ways. According to the cable complaint, Verizon first directed the customer to “STOP [the] pending order to disconnect,” offered to help customers “avoid the hassle of switching companies,” and also asked those customers “What can we do to retain your business?” Also, Verizon used “price incentives and gift cards” ranging in value between $50-$200 to retain those customers. More importantly, allege the cable operators, is that Verizon was supposedly doing this before the customers had been ported over to those cable rivals. Finally, according to the complaint, “thousands” of customers were retained by Verizon using these tactics.

So, there are two issues here: (1) Is Verizon technically violating any existing FCC regulations; and (2) do those rules make any sense?

I’ll leave it to the legal beagles to sort out the answer to question #1. From my perspective, the more important question is, regardless of what the regs say, what’s the impact of all this is on consumers and competition? On that point, it’s hard for me to see how those old number portability regulations make sense if they limit the ability of incumbents to play hard-ball in an attempt to retain customers. After all, that’s what we should want more of in the marketplace: good ol’ fashion head-to-head, facilities-based competition.

Two years ago, I told my personal story about how such cut-throat competition was playing out in my neighborhood as Cox and Verizon engaged a heated campaign for customer allegiance. In that post, I recounted how Verizon had made me a great offer to jump to their FIOS service and then Cox responded with some very generous inducements to get me to stick with them—including savings of almost $100 off my then-$220 triple-play bundle! (Note: I get everything from a carrier when I subscribe, so that’s why my bill was so high.) We should be aiming for more hard-nosed competition of that variety, of course. And winback efforts like cash inducements and rebates should be allowed (even encouraged) as part of that process.

That being said, the number portability rules have generally benefited consumers and competition by making it easier for people to jump from carrier to carrier. One of the reasons cable operators are stealing away so many telco customers today is because many of those customers are willing to make the switch if (a) it can be done quickly and (b) they can keep their old numbers after making the switch. The key here is that phone subscriptions are not like gym memberships. When you leave your gym, there’s nothing you need to transfer from one provider to another. By contrast, when you want to switch to a new phone provider, you generally want (or perhaps even need) to take your number with you–and you don’t want to be hassled about it. The LNP rules have generally accomplished this goal. [See, even a die-hard libertarian like me can admit that government regulations can, on certain extremely rare occasions, benefit consumers!]

Is there a “split-the-baby” compromise position here that would stop short of abolishing number portability rules but also encourage the sort of pro-consumer, cut-throat competition for our allegiance that we all desire? I think the answer lies in ensuring that there is a clear porting window during which both incumbents and rivals can court the customer. During that time the general rule should be: anything goes. Customers can be offered whatever inducements that carriers can dream of in an effort to win or retain their business. (Heck, in my area right now, Verizon is offering customers a free 19″ HDTV if they switch from Cox or Comcast over to FIOS. That’s certainly better than the crummy free calendar I got the other day for switching bank accounts!) If, however, at the end of that courting process the customer still wants to switch providers–and I have no idea how long the window should be open–they should be able to take their number and get it ported over promptly.

Bottom line: the FCC should be careful about regulating customer inducements by incumbents whether those offers happen before or after the porting process. The better approach would be to make sure that the incumbents can offer whatever inducements they want but then also make sure that rivals have a clear opportunity to respond and beat the offer.

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