AT&T Wireless Services Inc. Chief Executive Officer Dan Hesse says enough is enough when it comes to the press his company has received in recent weeks about capacity problems in New York.
“It isn’t a story anymore,” said Hesse in an interview with RCR. “Compared with other wireless companies and with traditional wireless quality, we’re doing quite well … We’ve put a ton of equipment in New York to improve service levels.”
The country’s largest wireless operator has taken punches in the media since the beginning of the year, as customers began to complain about poor quality, dropped calls and busy signals, primarily in New York. The carrier’s introduction of high-end, flat-rate, anywhere calling plans last May caused usage to skyrocket across the country, especially flooding the network in New York, the country’s biggest market. Hesse said minutes of use have doubled every eight months on the New York network even with the company scaling back marketing efforts there and holding off on the introduction of group calling plans it recently launched in the rest of its markets.
“We’re doing everything humanly possible to keep our growth in the New York market from moving into the stratosphere and have not done the kind of stimulation we’ve done in other markets across the country,” said Hesse.
Hesse said AT&T Wireless has more than doubled its digital capacity in New York, adding equipment that is equivalent to an entire network in Seattle or Minneapolis. The only constraint to adding capacity has been Ericsson Inc.’s inability to deliver enough equipment, said the CEO.
And Ericsson is taking the heat.
“All of a sudden calls come in and we get orders beyond what is expected,” said Skip Speaks, executive vice president and general manager of the Network Operators Group at Ericsson. “Our material flow is up three times from the previous year. We’ve done herculean things all around the world to make sure things are wide open.”
Now, Hesse said an independent study LCC International Inc. conducted in early July shows AT&T Wireless outperformed its competitors in New York in terms of lower blocked calls, more call completions and other quality issues. AT&T Wireless declined to provide the results of the study.
But some AT&T Wireless customers remain unhappy, revealing that perhaps the quality of traditional wireless networks doesn’t cut it anymore as one-rate plans such as AT&T Wireless’ stimulate high usage and demand for coverage.
“If customers used the phone in the past about 50 minutes per month and now are maybe using it 300 minutes per month, given the same network quality, they are going to experience more dropped calls,” said Speaks. “Quality of service may be the same, but they are using much more (so) that the quality of service will be much more important. The question is: How do we improve the robustness of service?”
Hesse said he is the first to admit that “we are not exceeding the expectations of as many customers on network quality as we’d like.” The carrier’s tests indicate the network in New York isn’t poor by traditional wireless standards, but Hesse believes customers’ expectations have increased.
“We’re trying to figure out the relationship between perception and the absolute numbers because we’ve always measured our network in terms of things like call blocking and dropped calls,” said Hesse. “Now we are saying, how can satisfaction be going down when actually the network quality in an absolute sense isn’t going down? We think quite frankly it’s a combination of people using their phone more and expectations going up. We welcome this because we want there to be more emphasis on quality as a competitive differentiator.”
The quality issue is likely to play out across the entire wireless industry in the coming months, say analysts, as established competition and consolidation level out pricing, making quality more important to customers.
“Prices, while continuing to decrease, won’t decrease at the same rate we’ve seen within the last 12 months,” said Bob Egan, research analyst with the Gartner Group, a consulting firm that caters to end-users at Fortune 500 companies.
“Months from now, price will not be the differentiating factor or the highest priority for anyone, especially business users,” he said. “The result will be that people will be focusing on quality and features. The companies that win are those that can provide the capacity, provide the coverage and provide the capability of the network that meets the requirements of subscribers.”
Capital expenditures should move up dramatically in the coming years. Paul Kagan Associates Inc. indicates capex budgets have increased an average of 62 percent this year, compared with the previous year, to keep up with one-rate plan demand. The research firm predicts cumulative investment in wireless system infrastructure could hit $70 billion this year. AT&T Corp. has allocated to AT&T Wireless $2 billion this year in capex vs. $1 billion the previous year. A large chunk of the money will go to increasing capacity.
“We’re on the cusp of a revolution where you have to have more and more access,” said Ericsson’s Speaks. “This is changing the paradigm of how we provide wireless service.”
Hesse admitted the press reports of AT&T Wireless’ quality problems in New York have hurt the company’s credibility there. Frustrated New York AT&T Wireless subscribers filed a class-action lawsuit in May against the carrier, claiming AT&T Wireless misled customers about its coverage areas. AT&T Wireless declined to comment on the lawsuit, but said it has filed a motion for dismissal.
“The press articles, I won’t deny, do hurt us because a lot of times customers haven’t tried other services and it misleads customers, not on purpose, into thinking the grass is greener,” said Hesse. “The ones that are very active in the wireless market are staying. Our churn on [Digital One-Rate] and heavy usage digital plans are very low.”
Analysts say the next quarters will become key for AT&T Wireless as more customers reach the end of their initial one-year contract. Despite the credibility problems, however, DOR’s stamina continues to surprise analysts.
AT&T Wireless exceeded analysts’ expectations for the second quarter, adding 473,000 customers nationwide and increasing wireless revenue by a record 42 percent. Average revenue per customer increased from the first quarter by more than $6 to $66.20. On a consolidated basis, AT&T Wireless now supports 8.8 million customers. DOR customers number 1.5 million.
And the off-net roaming expenses that have concerned analysts are improving. EBITDA margins, which have been relatively flat quarter over quarter, increased to 18 percent in the second quarter from 12 percent the previous quarter because of the improvement.
“What you’re seeing is a combination of acquisitions and our partners building out more and more footprint. We’re getting better and better roaming deals on the cost side, and we stopped adding DOR customers that shouldn’t have it,” said Hesse. “For the first year, we had people slipping through the cracks that were driving up roaming costs … Now, we have put systems in place that keep people off who don’t live and work in the footprint.”
