ACSI Commentary May 2012

Information Sector Lags Behind as Aggregate Customer Satisfaction Slowly Improves

First Quarter 2012 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 15, 2012

As of the first quarter of 2012, the national ACSI score continues to steadily improve, gaining ground in four of the last five quarters. Up 0.1% to 75.9 (on a 0 to 100 scale), aggregate national customer satisfaction is now higher than it has been since the third quarter of 2010.

Change in the National ACSI 1994 to Q1 2012

The weakness of the U.S. economy remains even though employment is edging back—at least for the private sector. Unemployment in the public sector continues to get worse and wages are stagnating. Due to the increase in hiring in the private sector, productivity actually fell in the first quarter. Worker earnings, adjusted for inflation, also fell. As a result, it would be unlikely for consumer spending to increase by much. ACSI data from last year predicted a 2.8% consumer spending growth for the first quarter of 2012, more than most other forecasts. Actual spending turned out to be 2.9%, one of the bright spots in an otherwise bleak GDP report.

Even though Americans continue to consume more than they produce, overall demand—particularly for domestic goods—is too weak and cannot accelerate the current rate of economic growth by much. Stronger customer satisfaction would help, but it needs to be combined with an increase in discretionary income. It is difficult to see from where such an increase would come. As a result, the ACSI forecast for consumer spending for the next quarter, based mainly on slight improvements in customer satisfaction in the aggregate, is about the same as it was for the first quarter: 2.8 to 3.2%. While this is not low compared with the recent past, it is not enough to spur much economic growth.

Change in Consumer Spending (PCE) and ACSI (lagged one quarter)

The slight improvement in customer satisfaction in the aggregate is driven by gains for the energy utility and health care sectors (published in the April ACSI release) that more than offset a small drop for the information sector. Of the eight industries covered by this release, only the motion picture industry improves, up 4.1% to an ACSI score of 76, while subscription TV service is unchanged at 66. The other six industries experience varying degrees of decline. Fixed-line telephone service (ACSI score of 70) and network/cable TV news (74) lose the most ground, dropping 4.1% and 3.9%, respectively. The remaining categories experience small ACSI dips ranging from 1.3% to 1.5%: cell phones (74), wireless telephone service (70), computer software (77), and newspapers (lowest among all ACSI industries at 64). Among individual companies providing information services, decliners outnumber gainers by a wide margin for a second consecutive year: only 29% improve, while 62% deteriorate and 9% remain the same.

Cell Phones and Wireless Telephone Service

Customer satisfaction retreats slightly for both cell phones and the wireless services for which they are used. As demand for mobile devices and services continues to grow, cell phone satisfaction drops 1.3% to an ACSI score 74, while wireless telephone service falls 1.4% to 70. This year, ACSI expands its cell phone coverage, adding LG Electronics, HTC, and smartphone makers Apple and Research in Motion (RIM) to the roster that already includes Samsung Electronics, Motorola, and Nokia. Apple’s iPhone debuts atop the industry with an ACSI score of 83. This is somewhat lower than Apple’s score for its Mac and iPad products (87 when last reported in September 2011), but still well ahead of all cell phone makers. Apple’s nearest competitors this year are three companies tied at 75: Nokia, up 3%, and newcomers LG and HTC.

Motorola declines 5% to 73 and ties the aggregate of all smaller cell phone makers (-1%). The slide cannot be welcome news for Google, which is in the process of sorting out how best to integrate its acquisition of Motorola and grow the share of devices using the Android OS. Samsung also loses ground, down 4% to 71, while RIM (maker of the BlackBerry line) lands at the bottom of the category with a score of 69. RIM is facing declining sales amid problems with hardware, software, and server issues that have caused email and messaging outages. Over the past year, RIM’s share price has fallen more than 70%.

Among providers of wireless phone service, all companies with the exception of AT&T Mobility experience small drops in customer satisfaction. The aggregate of smaller wireless providers (such as TracFone and U.S. Cellular) remains well ahead of the big carriers despite a small 1% dip to 76. Sprint Nextel, also down 1%, inches past the other large companies with its score of 71. Sprint’s recent addition of the iPhone to its portfolio of devices hasn’t helped boost customer satisfaction yet, but the additional burden on Sprint’s bandwidth doesn’t seem to have hurt either.

Verizon Wireless had held at least a share of the lead every year since the category was first included in 2004, but this year’s 3% drop to 70 marks the wireless provider’s third straight year of losing ground in customer satisfaction. New fees for phone upgrades and a surge in traffic accessing data has increased Verizon’s revenue, but at the expense of customer satisfaction. Verizon’s prices have gone up, but its reliability has not improved. Plus, bandwidth is increasingly challenged by Verizon’s nearly 110 million users.

AT&T Mobility rebounds from a sharp drop a year ago amid talks of a merger with T-Mobile that ultimately did not occur. AT&T improves 5% to 69 and ties T-Mobile (-1%) at the bottom of the category. Still, AT&T’s customer satisfaction comeback puts the second-largest wireless carrier into a near-tie with rival Verizon. AT&T is within striking distance of the industry lead for the first time since 2008, when it had an exclusive deal with iPhone. Although AT&T continues to play catch-up with Verizon, its more than 700,000 new subscribers in Q4 2011 were AT&T’s biggest gain in five quarters.

Fixed-Line Telephone Service

For the first time since ACSI initiated coverage of both fixed-line and wireless telephone services a decade ago, customer satisfaction with fixed-line has fallen into a tie with wireless after a 4.1% decline to an ACSI score of 70. This comes at a time when more households are dropping fixed-line service altogether. Just two years ago, nearly 1 in 4 households had wireless service only—now that number is approaching 1 in 3. Losing customers often leads to higher average customer satisfaction, since customers who choose to stay are typically the most satisfied. This is not the case for fixed-line service. As the fixed-line business shrinks, companies are investing less in infrastructure and new services. The result is deteriorating customer satisfaction, even as defections from fixed-line services are accelerating.

As in the wireless category, the aggregate of smaller local and long distance providers (such as Vonage and Frontier) stays well ahead of the big phone companies with a leading score of 76 (unchanged). All large providers decline this year and only one, Cox Communications, posts an above-average score. Cox slides 1% to 71 and is followed closely by AT&T and Verizon, both down 1% to 70. Comcast slips 3% to 67 after inching up slightly each of the past two years. CenturyLink loses the most ground, falling 6% to an industry low of 66. CenturyLink’s acquisition of Qwest in early 2011 has probably contributed to the decline. Mergers and acquisitions often create problems for customer satisfaction in the short term, especially when they involve consolidation of large portfolios of customers. Over the past year, CenturyLink’s share value has been flat.

Subscription TV Service

Despite more competition among cable, satellite, and fiber optic TV providers, customer satisfaction with subscription TV service stalls for a third year in a row at an ACSI score of 66. While the range of services is larger than ever, both reliability and cost are areas of concern for many consumers, especially as sales promotions end for newly acquired customers and prices revert to higher levels. Improving service reliability—while simultaneously refraining from price increases—will continue to challenge subscription TV providers in an economy where the monthly cost of these services sometimes rivals that of energy utilities.

Among the larger companies, Verizon’s FiOS fiber optic service is the clear leader, improving 3% to an ACSI score of 74. This score is well ahead of the nearest competitor, DISH Network at 69 (also +3%). So far, Verizon has maintained relatively high levels of customer satisfaction while growing its TV subscription business, perhaps in part because FiOS and its fiber optic rival, AT&T’s U-verse, are still not available in all parts of the country. Just behind DISH Network, U-Verse (unchanged) and satellite TV provider DIRECTV (-1%) are tied at 68. Along with its rising customer satisfaction, DISH’s share price has increased nearly 50% over the past year. DIRECTV, on the other hand, has not seen much of an appreciation of its shares for some time.

The four largest cable TV companies are well below the fiber optic and satellite TV providers for customer satisfaction. Cox Communications and Time Warner Cable move in opposite directions to tie at 63—Cox loses 6% and Time Warner gains 7%. Higher rates and fees for many Cox customers are sapping customer satisfaction. Comcast is next, up 3% to 61, while perennial industry laggard Charter Communications remains at the bottom, unchanged at 59.

Computer Software

Customer satisfaction with computer software slips from its all-time high from one year ago, dropping 1.3% to an ACSI score of 77. The aggregate of all smaller software makers (such as Adobe and Symantec) falls 3% to 77, but manages to stay ahead of software giant Microsoft, which decreases 4% to 75. Although software has the highest customer satisfaction among the industries in the information sector, traditional software purchased and installed on computers may soon become eclipsed by downloadable apps, as PCs continue to lose ground to mobile computing devices such as tablets and smartphones. This has been especially challenging for Microsoft, whose sales of Windows software continue to stall amid a shrinking PC environment and the increasing popularity of devices using Android and Apple iOS platforms.