Planning for Churn

One of the factors that need to be considered in any business plan or forecast is churn – which is when customers drop service. I often see ISPs build business plans that don’t acknowledge churn, which can be a costly oversight.

There is a maxim among last-mile fiber networks that nobody ever leaves fiber to go back to a cable company network. That’s not entirely true, but it’s a recognition that churn tends to be lower on a last-mile fiber network than with other technologies. But customers leave fiber networks. Customers might die or move away. Customers might hit hard economic times and be unable to afford the connection.

I wrote a recent blog that asked if broadband is recession-proof. That was really asking if customers drop broadband when they lose jobs or see household income drop. The reality is that some folks have no choice but to drop fiber if things get tough enough. I’ve read several recent articles talking about how inflation in rents is likely to drive a few million people to become homeless – that might mean moving in with somebody else or becoming truly homeless, and broadband goes with everything else in these circumstances.

Churn varies a lot by community, and an ISP considering a new market should research the relocation rate. About 9.8% of all households move every year, or just over 15 million households. The percentage of people who move annually has declined steadily since the 1960s, when the rate was twice the current level. Renters move a lot more often than homeowners – In recent years, almost 22% of renters relocate each year compared to 5.5% of homeowners. ISPs all know that renters don’t only live in homes, and in many communities, a significant percentage of homes are rented. Younger families tend to move a lot more often than older ones. Only about 1% of households move between states each year. About 16% of military families move every year.

Every ISP has customers who die every year. Pre-pandemic, around 2.7 million Americans were dying each year. During the pandemic, in 2020 and 2021, that leaped to around 3.4 million people each year.

Churn can be a big challenge for an ISP. It turns out that most people call to arrange electric, water, and broadband services before they show up in a new community – and in doing so, they most naturally call the incumbents. Somebody new to a town likely won’t know about a smaller or local ISP. Since most people come from communities with little or no competition, they don’t even know it’s possible to use an ISP other than the big incumbents.

Churn can be expensive. There is an obvious loss of revenue when a customer leaves. More insidious is the stranded investment in drops and installation costs that are no longer generating revenue to cover the investment cost. One of the most surprising things that fiber-ISPs often find is that they must continue to spend money on selling and new installations each year just to stand still with the penetration rate.

I’ve seen ISPs with interesting strategies for dealing with churn. I have one ISP client in a college community that hangs out at the university with a booth and a sign that says gigabit internet. College students know what that means, and the ISP has been successful in maintaining a good penetration in off-campus housing. I have clients who pay commissions to real estate agents who refer new homeowners to them. It’s fairly routine to have arrangements with landlords and rental agents to have them get the word out about a broadband alternative to the incumbents.

Churn is one of the details of operating an ISPs that many new ISPs don’t get for a while. But it’s vital to have a strategy. It’s far cheaper to somehow catch a new customer when they move to town. It’s far less costly to catch the new tenant moving into a building that always has a drop.

Stranding Fiber Investment

Fiber CableThere is one issue with fiber-to-the-home networks that doesn’t get talked about a lot. In areas with normal churn – people moving in and out – a fiber network will end up with stranded fiber drops and ONTs that have been built to homes and businesses which no longer have service.

This happens to all networks of course, but the investment from the curb to the customer is a lot more expensive in a fiber network than it is with a coaxial or copper network. The cable and phone companies normally just leave the drop in place and hope that sometime in the future that the residents at the address will want service again.

Most of these stranded investments come from a couple of causes. First are people that don’t pay their bills and have been cut off service by the fiber provider. In any given market when a new ISP opens their doors, a lot of households that can’t pay their bills will try to get service with the new company. And so if a new fiber provider doesn’t do good credit checks they tend to get flooded with the bad debt customers, and they will have invested in building fiber to a lot of places that aren’t likely to pay them.

But over time most of the stranded investments come from people who move. The new people moving into a home might not want the same service. But more often, the people moving into a home will have automatically called the incumbent cable or telco provider for service – generally not even knowing there is an alternate broadband provider available to them.

This is not an issue in those places where the incumbent is the fiber provider. But for competitive fiber providers this can turn into a sizable problem over time. I know companies that have accumulated stranded investments as large as 10% of the total passings in a market.

I have clients with different strategies for this problem. First, companies using external ONTs need to have a process for retrieving and reusing the ONT electronics at houses they no longer serve. A surprising number of companies leave the electronics in place hoping that they will get the customers back.

But the bigger issue companies face is how to reach new residents before they choose the competitor. People that move into a new town tend to automatically think of the incumbent provider when ordering the triple play, and it’s generally too late to get to them if they’ve already signed a contract for service.

One common strategy is to make deals with the most active real estate agents and rental agents in a market so that they tell new tenant about your fiber service. I have clients who give free service to such folks as a way to induce them to make sure that new tenants know about the fiber.

It’s also vital these days to keep good records on potential customers. If you miss an opportunity with a household that signs a one or two-year contract with the incumbent, you should have a software program that alerts you when that contract is going to expire so that you can make your pitch later. I’m always surprised at the number of clients that don’t capture and track this kind of information in any usable way. Over time you should know about every home in your fiber footprint. You should know who doesn’t pay bills, who doesn’t want broadband at any price, who has contracts with the incumbents, etc.

Two markets with an especially large potential for stranded investment are college towns or towns with a military base where a significant number of residents turn over every year. I have clients who have gotten very creative and work with the colleges and the military to make sure that information about them is given to new students.

But the takeaway from this discussion is that you are going to spend more money building fiber than you might have planned for in your original business plan. Fiber drops are not cheap – particularly buried ones – and you are going to build plenty of drops that never drive enough revenue to cover their costs. Your best way to fight this is to always check the credit of potential customers and to have a plan in place to be able to market to new people who move into your community.