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AT&T Wireless Slips to Fourth at Consumer Reports, but Should Investors Care?


The bottom line is, yes. But not to the exclusion of a myriad of other factors that should be part of your due diligence.

Last week, Consumer Reports came out with their ratings for wireless service providers. Verizon (NYSE:VZ) continues to lead the pack for postpaid providers with AT&T (NYSE:T) lagging. AT&T did score well for its 4G service, which is becoming the lead service offering in the industry. As a result, AT&T may see some improvement in Consumer Reports rankings going forward.

As I read the article, I got to thinking about whether ratings such as these mattered to investors. The answer, of course, depends on whether or not there is linkage between ratings and subscriber growth. Or maybe the answer depends on the perception investors have of whether ratings matter to subscriber growth.

On the reality question of the linkage, I am skeptical. First, churn (customer turnover) statistics are widely available, and the differences between AT&T and Verizon or among cable companies are not large. While cable churn is above satellite churn, Fox (NASDAQ:NWSA) and their highly rated service doesn't churn that much less than Comcast (NASDAQ:CMCSA) and its poorly rated service. With both wireless and multichannel TV services approaching full penetration, churn will matter more. I just don't see the difference in churn so far, even as consumer ratings of services vary widely.

This brings me to my second point on reality. Consumers choose services and churn among services for reasons far beyond service quality. For example, AT&T has a huge lock in with Apple (NASDAQ:AAPL) iPhone subscribers. Comcast has the benefit of triple play bundling and the dominant broadband network in most of its footprint. Leaving AT&T for Verizon because you don't like AT&T's service is difficult for a family with a bunch of iPhones all purchased at different times and now on different upgrade cycles. Leaving Comcast for DirecTV (NASDAQ:DTV) will probably cost you money when Comcast unbundles your broadband service from your video service. Same thing happens if you leave Comcast for Netflix (NASDAQ:NFLX) or other over the top options. Guess whose network you will be paying more for to access your over-the-top options?

Despite my beliefs about Consumer Reports ratings and stock prices, I reached out to Gerard Hallaren, the excellent telecommunications analyst at Janco Partners. Gerard did support some of my view by noting that as AT&T slipped from No. 2 in 2010 to No. 3 in 2011 to No. 4 in 2012 in Consumer Reports ratings, the company showed excellent churn and customer retention. Like me, Gerard noted the iPhone as the driver. Gerard also noted that "AT&T faced serious consumer backlash circa 2009-2009 and it not suffer badly." At that time, AT&T was the exclusive iPhone provider.

However, Gerard has looked at the relationship between ratings and churn more closely. He believes "it takes about two years for Consumer Report ratings or other bad consumer press to translate into numbers at the carriers." This would suggest AT&T could face some trouble ahead if its 4G LTE efforts – which rated highly at Consumer Reports -- do not improve its standing with customers. It could also explain Comcast's Xfinity rebranding which is designed in part to improve its image with current and potential customers.

Hallaren also notes that "branding or service quality and matching customer expectations historically has had more to do with customer satisfaction than network performance." If ratings measure satisfaction, a damaged brand like AT&T or Comcast could face issues even as their networks match or exceed the performance of their peers and competitors.

I do think service ratings matter. Eventually. However, I think it plays out over a much longer time frame than most investors believe, much like my couch potato thesis, which suggests that changes in the TV usage by households happens a lot more gradually than Wall Street, journalists and bloggers believe.

As an investor, I am looking to value the stream of future cash flows. I don't think consumer service ratings matter that much to those cash flows because I don't see churn rates spiking for poorly rated service providers.

Perception does matter, however. For stocks, perception becomes the multiple I will pay for future cash flows or the discount rate I apply to them. Here, ratings can matter as AT&T might receive a lower valuation for the same cash flows as Verizon. Further, whether it is me acting as a portfolio manager or Gerard Hallaren acting as an analyst, we are paid to make decisions, to choose among competing investments. AT&T's poor ranking makes it easier for me own Verizon instead of AT&T or for Gerard to recommend Verizon while keeping a neutral rating on AT&T.

The bottom line: Service ratings should be part of your due diligence as an investor. Just don't let service ratings color your investment decisions more than the many other factors you should consider.

Comcast is a net long position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, entertainment, leisure, communications and related technologies. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in the funds' investment management company and has personal monies invested in the funds.

This column was previously published by SNL Kagan on
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No positions in stocks mentioned.
Entermedia is a long/short equity hedge fund focused on media, communic= ations, and related technologies. Steve Birenberg is co-portfolio manager o= f Entermedia, owns a stake in the Funds' investment management compan= y, and has personal monies invested in the Funds. CBS and Discovery Communi= cations are widely held by Northlake Capital Management, LLC, including in = Steve Birenberg's personal accounts. Steve is sole proprietor of Nort= hlake, a long only registered investment advisor.

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