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Buying Customer Goodwill, And Keeping It

Anyone who runs a business knows that customers are among its most important assets. And although customers cannot be bought or sold, their presumed loyalty is a major consideration in nearly every merger.

So, when AT&T agreed to buy T-Mobile USA from Deustche Telekom for $39 billion this week, T-Mobile’s customer base was included in the price. But AT&T is going to have to tread carefully if it wants to keep the customer goodwill it is purchasing.

The acquisition presents a particular problem because of the different frequencies used by the two companies to provide service for Internet-enabled smart phones. After the deal is finalized, AT&T plans to reconfigure T-Mobile’s existing 3G towers so they can instead provide faster 4G service, which AT&T has aggressively rolled out across its existing network. The result will be a much larger area in which customers can receive 4G signals.

The drawback is that current T-Mobile 3G smart phones will be unable to use the new infrastructure. Once the towers are converted, those T-Mobile phones, some of which are still new, will become suddenly obsolete. With the T-Mobile infrastructure dismantled, AT&T will have no way to honor the promises T-Mobile made to provide service for those phones.

Wireless companies subsidize the cost of most phones, particularly high-powered, Internet-enabled 3G and 4G models, and then make up for the initial outlays over the course of the service contracts they require customers to enter. This means that if the new AT&T allowed T-Mobile customers to simply swap out their phones for AT&T compatible ones, at the standard price, the company would risk subsidizing phones and then having contracts end before it recouped its money. If, on the other hand, AT&T tacked new contracts onto the new phones, customers would be stuck with a carrier they may never have wanted. AT&T might temporarily keep the customers, but it probably wouldn’t get much long-term goodwill from them.

There may not be any perfect solutions to this problem, but there are some possibilities that would treat both sides relatively fairly.

T-Mobile customers whose 3G phones no longer work could simply be allowed to terminate their contracts. They could then buy new phones and enter new contracts, either with AT&T or with another carrier, such as Verizon or the much smaller Sprint. The new carrier would subsidize the cost of the new phone and be rewarded with a full contract term. Customers might be annoyed to have their contracts come to such an abrupt end, but they would at least be able to choose their carrier freely.

Alternatively, customers could be allowed to finish out their T-Mobile contracts using AT&T phones not subsidized by the company. They might, for example, be able to buy used AT&T 3G phones, which will likely flood the market as current AT&T users upgrade to 4G. Or they could have an opportunity to buy new phones at full cost. This would give customers the chance to complete their contracts, though those not interested in renewing with AT&T would be out the cost of the new phones.

In reality, time may provide a third solution — one that is fairer, but that delays progress for everyone. Before any towers can be converted, the deal must be finalized, and before that can happen, regulators must give their approval. Rep. Anna Eshoo, D-Calif., the senior Democrat on the House communications subcommittee that will examine the deal, has already pressed the Justice Department and the FCC to “carefully examine the proposed transaction.” Even barring unforeseen hold-ups, the deal is not expected to close for around a year. Ralph de la Vega, AT&T's head of wireless and consumer services, told The Associated Press that the tower conversion process, too, will most likely take several years.

Since the standard length for cell phone contracts is two years, all of T-Mobile’s current contracts may end up expiring before T-Mobile 3G service goes offline. De la Vega said the transition to the new phones will likely happen as part of the ordinary end-of-service-term upgrade process. When their T-Mobile contracts expire, customers will be able to choose whether or not to buy a new AT&T phone and enter into a contract for service. Meanwhile, AT&T’s current customers will have to wait before they can take advantage of the wider 4G coverage the acquisition is intended to bring them.

Regardless of when or how the conversion happens, AT&T stands to gain many new customers. Whether it keeps most of them for the long term depends, as it should for any business, on how much it makes them feel welcome.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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