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Where'd the Service go? (or why I'm tempted to short DirecTV's stock)

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Companies thrive or die based on V-C. By V I mean the Value they provide to the customer, by C I mean their Costs in delivering this Value. Now the company doesn't determine the Value, only the customer can do that (just how badly did you want that new iThingy?). What the Company gets to determine is P or the Price, which will lie somewhere between V and C. The difference between V and P is called Customer Surplus and it is what you and I use to decide which particular Thingy to buy. Not just the one with the most whatever it is that we value, but the one that gives us the most of that for the buck. The difference between P and C represents the Profit that the Company makes on the sale of its product or service. Clearly the bigger V-C, the bigger both V-P and P-C can be - hence happy customers and profitable companies.

That all sounds good, but what if you are in an industry where almost every company's Vs and Cs are the same? Think of the Cell Phone world. We can talk about a better network, less dropped calls etc. etc., but after a while the whole thing settles down to 4 or 5 major players who's networks are frankly identical from the consumers' point of view. If that is the case then what stops all the customers from company A from switching to company B or vice versa? Well there are two more factors to consider. Firstly when they have an advantage that gives us a Value edge, the company wants to protect it so their competitors can not copy it. They might do this via Patent protections or perhaps via trade secrets (what is Coca-Cola's secret recipe?), but they will try to do it one way or another.

What if there aren't any real technology differences here, again think of cell phones. Well then they will try to focus on Customer Retention processes. One way to do this is through providing excellent service to your customer. If they are getting what they want, when they want it, at the same price they could get it elsewhere, why would they bother switching? This introduces another key point, switching costs. Have you ever changed your bank? If you have I am willing to bet it was an extremely painful process. So many people need your account info (your employer perhaps being the most important), and you have to notify each and every one of them. Ultimately some one gets forgotten, a bill doesn't get paid and there are nasty phone calls or worse to deal with. Hence we don't switch banks unless ours gets truly awful and the switching costs, however onerous, don't seem as high as the cost of staying. Many industries benefit from naturally high switching costs, Microsoft being one of them.

It is worth underlining the fact that high switching costs will not protect a poor company for ever, but they do give you a grace window in which to restore your customers' happiness before they desert you. There are no necessary switching costs with cell phones (at least since number portability) so the cell phone folks have created one. They give you the ability to lower your entry costs by basically selling you the cell phone device on credit terms. If you leave early, your entire cell phone purchase becomes due at that time and hence you have an incentive to work your issues out with them rather than just leave. How do customers react to this kind of barrier? It isn't too bad because after all you are getting a service for your money (the easy credit arrangement) and these days most phones will work on most networks so you can still move your service if you want to - other than a minor hit to your cash flow there isn't really a penalty. Further more, if you don't like the deal, you can still buy your own phone and go month to month (ie no early termination) instead.

So what is different with DirecTV? Firstly we should understand that the Satellite TV business is not a very safe one right now. The cable companies and your Telephone providers (collectively Network Service Providers - NSP's) are already in a deep battle for who will be the provider of choice for TV service (powered by the increase in bandwidth and much better compression ratios making IPTV commercially viable). These two both have a huge advantage over the Satellite folks. They can support Video on Demand and Internet connectivity and satellite can not (or at least not at the same value point as the NSP's). The switch is already beginning and I am sure that execs at the satellite companies all have nightmare full of Ross Perot style sucking noises as the see the customers leaving taking their profits with them in a swirling vortex down the proverbial drain.

So what to do? Well if you aren't very bright, you might think "let's put up the switching costs just like the cell phone companies do". So imagine that you "sell" the set top box to the customer, and while you are at it make it a DVR to help offset the "appointment TV" restriction of your service. So far not so bad, but here's the rub...when a customer does want to leave is the box that you are now going to make them pay for any use to them? No, the satellite folks created the own independent standards to increase switching costs between each other, thinking that their biggest competitors were each other. You can't use your DirecTV box anywhere else, even though it has a nice DVR in it. But DirecTV goes even one stage further...they require you to send the box back when you leave, they are not even actually selling it to you (although the customer service rep may not be too upfront about this). So what is the money in the early termination fee for? Perhaps it is to defray the installation costs - nope, it even exists with self-installs too. A fee to represent the loss of use of the box - nope, the can and do send these boxes back out to new customers and the one I got was already "reconditioned". So what will customers really resent, IMHO it is charges that represent "bad blood" stingers if you wish to stop doing business with the company. There is no reason for this charge other than to hurt the customer for wanting to leave. Can a company survive with this attitude to customers, I believe not (hence the stock shorting idea).

So are the satellite companies just doomed? Should they put onerous charges on everyone as they leave and milk every penny they can get before the inevitable end? Believe it or not DirecTV appears to think so, in fact they think that they can make such agreements effective whether the customer signs up for them or not. According to their "Customer Service" personnel they can write these terms on the back of your bill (which we don't get because the encourage eBills) and then if you pay that month's bill you have, in their opinion, legally agreed to the enforcement of the contract.

My advice to DirecTV, understand that is the quality (or otherwise) of your service which is the only real way you can save your company....it's all about V-C and if your VP of Marketing doesn't understand that then I suggest you interview for one that does. If you have a great service at a great price, you don't need to abuse the customers that leave because most of them won't and those that do will probably return. If on the other hand you abuse your customers there is no chance they will return what ever you do and they will probably share there experience with a very large number of people. You have advantages in the fight with the NSP's in that you have a broadcast system that can reach a vast number of people with out the kind of house to house infrastructure that the likes of Verizon and AT&T have to build. Focus on great TV delivery, get a Customer Service department that actually values customers and use your potentially lower costs to protect yourselves with a larger V-C even if your V is actually lower. Work together with your industry to develop common standards to make it easier for customers to move if they want to (and thus easier to come back too) and your future will still be bright. Continue to forget that it is your customer that pays for your comfortable executive dining room and you won't have to worry about it for long.

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