Telcos Butter Up the Churn

On subscriber growth and customer retention, Entner says there are "three ways to make the numbers pretty."

The first is the most common, promotions. Telcos typically dangle free phones to lure customers and pump up growth. Second, carriers can lower credit qualifications that would normally screen out potential deadbeats. And third, companies can delay account closings to protect churn rates.

There are no hard and fast rules about when a company has to close the account of a nonpaying customer. Analysts say some companies will leave the account open until the end of the billing period and others may leave it open for three months, on the outside chance that the customer may come back.

In these instances, the subscriber is counted twice, once as a new customer with a new carrier and again as an existing customer at the previous carrier.

Cingular and Verizon Wireless dispute the notion that there is any wiggle room and say they immediately close the customer's account when service is canceled.

The policy is less clear among the resellers for Cingular and Verizon Wireless. Typically resellers -- the name given any wireless outlet not controlled directly by the parent telco -- are given an allocation of phone numbers and told to report the net gain or loss of customers.

Analysts say a lot of the subscriber accounting is left to the discretion of the resellers. Normally these include a lot of prepaid accounts that are on a month-by-month status, making them particularly difficult to track.

Industry insiders and analysts also say there is not a lot of vigilance when it comes to cleaning out dead accounts. One reason is that coming clean on customer defections could damage churn numbers, say industry watchers.

Churn is calculated by dividing the number of disconnects by the total subscriber count. If the deadwood were culled from the total customer count, the smaller roster would make defections proportionally larger.

The industry averaged about 2% monthly churn in the first quarter, and any company deviating significantly from that number could end up being punished by investors. As we have seen, Wall Street might love a growth story, but it has little patience for deception and laggards.