Network operators typically spend almost four times as much on customer acquisition and retention as they will on traditional network operations. That’s up almost a third over a five-year period, and it has major implications for the way we think about managing operations costs, since customer A&R is usually lumped into operations expenses. Why is this happening and can anything be done about it?
The reason why A&R costs have grown much faster than traditional opex costs is due in part to the fact that traditional opex is now declining. Operators have been working for two decades to drive human costs out of network operations. They’ve reduced craft provisioning and installation costs, they’ve reduced truck rolls on problems, they’ve charged more costs back to customers. All of this has worked because the Internet is a kind of support wild west, broadband users are used to dealing with chatbots and other stuff in online services, and so they’ve learned to tolerate them in their network services too.
I can personally remember a time when you couldn’t make a call between exchanges without operator assistance. I sat with a woman on a flight once, and she told me her grandmother (who still lived) had placed the first transcontinental call ever made in the US. I once ordered a phone installation in a travel trailer slip, and they ran a line for a mile and a half to do the job, which earned them about ten bucks a month in revenue. All these show how much human cost has been wrung out.
On the acquisition and retention side, there’s no question that there’s a lot more wireless competition. Not only are there multiple “real” operators who field their own infrastructure for services, there are MVNOs who target specific market niches, and of course there’s the continued prepay/postpay debate, and an increased number of mobile services that don’t fit neatly in either of those categories. Competition means differentiation, and differentiation means feature differentiation or price commoditization, and this is the core problem with acquisition and retention charges.
A network service is an almost-worst-case situation from a feature differentiation perspective. The best you can hope for as a provider is that the customer will never really think about the service at all. If they notice anything, it’s almost certainly a bad thing, and so you’re in trouble just by being visible. Operators have had at least a hazy understanding of this for a decade, recognizing that “communications” wasn’t the goal any longer. It was experience delivery that mattered, and they were only the plastic pipe doing the delivering. They called it “disintermediation”, but that implies they were ever “intermediated”, and they were not. There was a mission transformation that came along with the Internet, and operators just didn’t see it. Many still don’t.
What do mobile or wireline broadband users see? The experience, as I’ve said, but also the local device through which they gain experience access. In both mobile and wireline networking, that local device is often a smartphone, though wireline broadband’s biggest bandwidth consumer is a flatscreen TV. Among singles, smartphones are close to dominating even wireline broadband usage. The point is that if the service doesn’t have features, then the feature gateway is the device, and that’s had a major impact on acquisition and retention costs.
My first mobile phone was as large as a thick hardcover book and cost me about a thousand dollars. All I could do with it was (at least occasionally) make a phone call. Today’s smartphone is way smaller than a paperback and you can get them for half that price. Not only that, the smartphone has actually replaced the paperback for many, which illustrates how important device features are in realizing experience delivery. This feature dependence on devices has led operators to try to differentiate themselves as much or more with smartphone giveaways and annual refresh plans as they do with service quality or even price. There are often free phones, payment plans, and plans that guarantee a new phone annually. Needless to say, these plans drive up customer acquisition and retention costs, but they do have the advantage of creating loyalty, and they can also be useful when something like 5G comes along, because they get suitable handsets in the field faster. The big point here is that operators have almost universally decided that they need to promote handsets and not their services. You can see that reflected in their TV advertising.
Given this shift to handset-differentiation, it’s unlikely that operators will gain as much from further optimization of network operations costs as they’ll lose (concurrently, but not as an effect of network operations optimization) in customer acquisition and retention overruns. I’m getting the sense that what operators are now trying to do is to hold the line in operations costs, reduce errors and problems that generate outages that complicate acquisition and retention, and efficiently manage any new infrastructure they may deploy.
Service quality or QoE is seen by some operators as a tool in customer retention, but there isn’t much direct evidence to support this. The problem is that while users will flee a provider who has regular issues with availability and quality, they don’t seem to be able to recognize differences between services that aren’t failing outright. Verizon, who used to run “can you hear me now” commercials when mobile services were problematic in many areas, stopped the practice when most operators had service in most places. There are many factors related to QoE for online experiences and the ISP is only one of them. Thus, few operators have justified increased spending on operations to improve acquisition and retention.
Put into this framework, the “cooperative features” model that AT&T has said it’s committed to makes sense. If operators could create service features that promoted OTT partnerships, then those partnerships could generate retail services that would differentiate the partnering operators, to the extent that competing operators didn’t do the same thing. Of course, the value of any cooperative features would depend in part on whether they could be created, shared, and exploited efficiently. Any issues with service quality at the lower level would be inherited by the OTT partners, who would then push back or perhaps seek options elsewhere. Operations cost issues could push up wholesale prices to OTTs, retail prices to users, and tamp down demand for the services throughout the stack.
OTT cooperation is easy to say, but in order to do it the operators would have to spend some effort thinking about the direction service evolution might take. OTTs are unlikely to come to operators to talk about this, for the logical reason that such discussions would then likely get to competitors. Operators who had an idea about future service directions, particularly ideas they could help realize, would have everything to gain by touting these ideas to the skies, because a highly distributed and competitive community of providers would encourage them all to take advantage of any operator-provided features that might improve service quality and reduce time to market. It’s going to be interesting to see how the operator community in general, and AT&T in particular, move forward on this.