ACSI Commentary May 2011

A Very Mixed Picture for the Information Sector

First Quarter 2011 Update on U.S. Overall Customer Satisfaction
and Commentary on Cellular Telephones, Computer Software, Fixed-Line Telephone Service, Motion Pictures, Network/Cable TV News, Newspapers, Subscription Television Service, and Wireless Telephone Service

By Professor Claes Fornell
The Donald C. Cook Professor of Business Administration
Stephen M. Ross School of Business, University of Michigan

May 17, 2011

After two quarters of negative change, the aggregate ACSI turns positive this quarter—up 0.4% to 75.6—but only because gains in the utilities and health care sectors, released in April, more than offset a 0.7% drop in the information sector.

Change in the National ACSI Benchmark

Customer satisfaction improves for computer software and network/cable TV news and weakens for telecommunications and motion pictures, while newspapers and subscription TV service are unchanged. The bad news is that decliners outnumber gainers by a wide margin: only 27% of the companies improve, 64% deteriorate, and 9% remain the same. Because the information sector is heavily dependent on repeat consumer business, lower customer satisfaction implies that those companies that bucked the trend and strengthened their customer relationships are likely to take market share, while those that didn’t will face challenges and more price pressure. In the former group, winning companies include Motorola, Sprint, and possibly Qwest, DIRECTV, and Microsoft, but Samsung, Nokia, AT&T, T-Mobile, Comcast, Time Warner, DISH Network, and possibly Verizon are in the latter category.

The aggregate customer satisfaction data collected in 2010 pointed to a weakening in consumer spending for the first quarter of 2011. This forecast was accurate. Consumer spending grew at an annualized low rate of 2.7%. Although the ACSI forecast at 3.1% was near the mark, the historical relationship between consumer spending growth and customer satisfaction growth has diverged since 2009. During the recession, spending growth was negative. If for nothing but population growth, it is unusual for spending growth to remain negative. Unless circumstances are severe, spending will almost always increase. The growth in consumer demand that comes about during the first phase of economic recovery is less dependent on the satisfaction of the customer and more to do with resuming consumption that was postponed in the economic downturn. For a recovery to take hold and generate long-term profit potential, which would be necessary in order to make a significant dent in unemployment, repeat business is going to be critical. And, for that to occur, customer satisfaction is important.

National ACSI Benchmarks and PCE (Consumer Spending)

In view of the lack of overall strength in aggregate customer satisfaction, it is difficult to envision much of an increase in consumer spending in the near future, except from inflation in gasoline, commodity, and food prices. At best, consumer spending growth for the second quarter looks to be about 3.7%, before adjusting for price increases.

Subscription TV Service

Customer satisfaction with subscription TV service is unchanged at an ACSI score of 66, a year after surging 4.8% to an all-time high. Quality, especially from fiber-optic and satellite, has improved in recent years, but higher fees are significantly dampening customer satisfaction, more so than in other industries. Bundling of services such as phone and Internet access may have been both a blessing and a curse for the industry. A couple of years ago, a variety of bundling promotions boosted what people saw as value for money, with the advantage of both cost savings and the convenience of getting multiple services through a single provider. Now, as many of these promotions have ended, subscribers with bundled services are becoming less satisfied and more concerned about price.

By a solid margin, Verizon’s fiber-optic service, FiOS, holds the top ACSI spot for a second straight year even though its score drops slightly by 1% to 72. Although this service is not yet available in many geographical areas, the company almost doubled its number of subscribers over the past two years. Nevertheless, Verizon’s 3.7 million FiOS subscribers are few compared with the big cable and satellite companies. DIRECTV remains the highest-scoring, truly national subscription TV provider, up 1% to 69. It recaptures the satellite satisfaction lead from DISH Network, which falls 6% to 67. Subscription growth was flat for DISH in 2010. Correspondingly, DISH’s stock price growth was at market over the past year, rising 17%, whereas DIRECTV’s rose by 40%.

AT&T’s U-verse, Verizon’s fiber-optic competitor, drops 6% to 68. U-verse, at 3.2 million subscribers, has a slightly smaller reach than FiOS, and its growth seems to have slowed. Customer complaints about picture quality, particularly for HD channels, have increased as AT&T grapples with bandwidth challenges across several of its telecommunications services. Behind AT&T, Cox Communications remains the highest-scoring cable provider (unchanged at 67), well above the other three cable companies. Comcast (-3%), Time Warner (-3%), and Charter Communications (-2%) are all tied at the bottom of the industry with low ACSI scores of 59.

Fixed-Line Telephone Service

While fixed-line telephone service is not becoming extinct quite yet (there are roughly 100 million landline households in the U.S.), it is not a growth business. More than 25% of all households now have wireless service only. Wireless also has much greater household penetration (93%) than fixed-line (74%) service. As telecommunications companies devote comparatively fewer resources to their shrinking and smaller fixed-line business, one would expect customer satisfaction to drop. The industry’s ACSI score does fall this year by 2.7% to 73.

The aggregate of smaller local and long distance providers such as Vonage and Frontier also falls 3% to a score of 76, but this group remains ahead of the top two larger companies—Qwest at 73 (+1) and Cox Communications at 72 (-3%). The other major fixed-line providers either decline or are statistically unchanged. AT&T drops 5% to 71, erasing the gain it earned one year ago. This puts AT&T in a tie with Verizon, down 3%. CenturyLink is unchanged at 70, while Comcast advances for a second straight year—up 1% to 69, but remaining in the industry’s hinterland.

Wireless Telephone Service

Customer satisfaction with wireless weakens by 1.4% to an ACSI score of 71, but is nevertheless much stronger than it was prior to 2010. Growth in consumer demand has stretched and challenged capacity, even as providers roll out new products and services. Customer satisfaction with the cell phone devices themselves also dips slightly, down 1.3% to 75. Among manufacturers, Motorola (+1% to 77) outpaces last-place Nokia (-4% to 73), whose U.S. market share has contracted.

The aggregate of smaller wireless services providers, such as TracFone and U.S. Cellular, continues to lead the category, up 1% to an ACSI score of 77 and far outdistancing the larger companies. Among the big providers, Verizon Wireless dips 1% for a second straight year, falling to 72 and tying Sprint Nextel. The latter company continues its upward trend, rising 3% following consecutive double-digit gains. In just three years, Sprint has emerged from 15 points below even the second worst in the category to claim a share of the industry lead. Improved quality of services and aggressive pricing appear to have paid off.

It is common to find a reduction in customer satisfaction after mergers. It is less common that customer satisfaction drops ahead of a merger. But this is the case for AT&T and T-Mobile, whose proposed merger should be completed in about a year, pending what is expected to be a long regulatory process. Both companies show a large deterioration in customer satisfaction and in customer service. T-Mobile falls 4% to an ACSI score of 70, matching a 5-year low, while AT&T descends by 4% to 66, its worst score since 2006—the year before the launch of the iPhone. AT&T’s decline for its wireless service is consistent with similar drops in its fixed-line and subscription TV satisfaction.

Computer Software

Customer satisfaction with software surpasses all other information-related categories, rising 2.6% to an all-time high ACSI score of 78. Smaller software companies like Adobe, Intuit, and Symantec lead, up 3% to 79, with Microsoft close behind after a 3% improvement to 78. This is the third straight year of ACSI gains for Microsoft. While sales of Microsoft’s Office suite of products continue to be strong (up 21% in the first quarter), sales of its Windows software declined 4% from the previous quarter as a result of a similar drop-off in PC shipments. Customers are more satisfied with Microsoft’s software, but, for now, the company is selling less of it.