Hidden Asset for AT&T; if It Buys TCI: Loyalty

WASHINGTON —  Investors have given a cold shoulder to AT&T;’s proposed acquisition of cable giant Tele-Communications Inc., believing that upgrading TCI’s aging cable systems for phone service and Internet access will prove complex and costly for AT&T.;

That may be true. But one aspect of the deal that has been overlooked by many analysts is that the kind of customers that AT&T; would acquire--cable TV and Internet subscribers--tend to be a lot more loyal than long-distance customers.

Long-distance phone users have become costly to hold on to as the nation’s more than 500 long-distance carriers have intensified their marketing campaigns. The problem is even more pronounced in AT&T;’s other key business, cellular phone service, where so-called churn rates are approaching 30% as upstarts flood the market with promotional deals for wireless service. That’s why one-stop shopping schemes bundling Internet access, phone and video services have become the Holy Grail of the telecommunications industry.

“It always costs more to acquire a new customer than to retain a current customer,” explained AT&T; spokesman Mark Siegal. “When you have no competition--like you have in local phone service--you are not going to see a lot of churn. But in something like long-distance, where you have hundreds of companies competing, you are going to see a lot of churn.” (The churn rate is calculated by dividing the number of new customers by the number of defections.)

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A 1995 Digital Equipment Corp. study estimated that it could cost a telephone carrier with a 30% churn rate among 100,000 subscribers at least $8.25 million a year in additional marketing and customer support costs. Although AT&T; does not disclose its long-distance or wireless churn rate, the company reports it has 70 million long-distance customers and about 4 million wireless customers.

By contrast, retaining cable TV customers requires virtually no effort, despite more than a decade of federal efforts to promote more video competition.

The only significant competition cable TV operators face is from direct-broadcast satellite services and a few other emerging wireless cable services. And unlike cable, DBS can’t yet offer local TV signals, so subscribers can’t receive local sports and news.

Even where there is choice, there are practical barriers to switching cable service: It often involves a trip to the store or an inconvenient house call from a cable installer. By contrast, you can switch long-distance service just by picking up the phone.

For similar reasons, Internet and data customers also are a captive audience. Many Internet subscribers are reluctant to go through the cost and inconvenience of changing their Internet provider because it often means they will have to change their e-mail address. Many routinely endure poor service rather than switch.

America Online Inc., for example, has been sued in court three times in less than three years over billing errors and overloaded access lines. And the company was ranked last in reliability and performance this spring among the 23 big Internet service providers by Inverse Network Technology of Sunnyvale, Calif. Yet AOL is thriving, with more than 12 million customers.

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AOL spokeswoman Tricia Primrose took issue with the ranking, calling Inverse’s methodology misleading. But she conceded that AOL has had service difficulties in the past.

“In the winter of 1997 we had terrible access problems, but [since then] we have expanded our network,” Primrose said. “Our reliability is pretty high. . . . We handle 30 million pieces of e-mail every day and 8.1 million hours of usage per day.”

Still, reliability and cost appear to rank below the inconvenience of switching providers when it comes to Internet service. That’s especially true among business customers, who are routinely plied by service providers promising lower cost and greater reliability.

A case in point is Vertical Systems Group Inc., a Dedham, Mass.-based computer consulting firm that found switching its dedicated high-speed Internet access service proved such an ordeal that a company official vows never to do it again.

“It’s a pain,” said Erin Dunne, director of information technology at Vertical Systems. She said it took weeks to order and install a new high-speed data circuit to connect to the Internet and change all of their IP addresses--the numerical pointers that direct Internet traffic to the company’s Web address.

“You have to change a whole bunch of things if you want to get new service,” Dunne said. “It involves time, frustration and the fear that there will be a glitch and you will suffer major downtime.”

Times staff writer Jube Shiver Jr. can be reached via e-mail at [email protected].