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November 18, 2008

Help Jobless by Giving Them Free Mobile Service?

By Gary Kim, Contributing Editor

U.S. wireless operators should create a program to provider free wireless service for up to a year, or for as long as it takes for people to find new jobs, argues J. Gerry Purdy, Frost & Sullivan (News - Alert) VP in an open letter to AT&T (News - Alert) Wireless, Verizon Wireless, Sprint, T-Mobile and Metro PCS. Purdy argues such programs is the right thing to do, generates good will, and it could be a competitive differentiator if all operators do not offer such programs.

Before one is tempted to dismiss the open letter as a stunt, a quick stab at quantifying what this might cost carriers. Assume a monthly deferred subscription costs the carrier $40 a month, and that there are 10.1 million officially receiving unemployment compensation.
Of course, the issue is that unemployment is higher by some amount, as not everyone who is not working, but wants to, collects unemployment. But for the sake of simplicity, restrict the program to people getting unemployment insurance. Ignore for the moment the likelihood that unemployment compensation claims will ratchet up a bit over the next couple of quarters, any lag time to certify that a person is eligible, and that some way can be devised to end the program when a person goes back to work.
Assume for the sake of argument--using Bureau of Labor Statistics data--that the average duration of unemployment is five weeks for 30 percent of claimants, five to 14 weeks for 30 percent, 15 to 26 weeks for 18 percent and 22 percent for those receiving unemployment for more than 27 weeks.
Take a mid-point average for each of the duration cases (assume the mid-point duration for each person in the five-to-14 week range, the 15-to-26 week range and assume a 40-week duration for the 27 weeks or more claimants.
Keep in mind that holding unemployment claims steady at 10.1 million for the year, that even though there are only three million people at any one point in time with a claim duration of four weeks, each month three million will end the program and three million will start. So a snapshot of three million people staying on unemployment only for four weeks means as many as 36.4 million discrete people or cases over a 12-month period. The same is true for unemployment claimants in the other categories as well.
Although there are three million people getting benefits for nine weeks, on average, that means as many as 18 million over the course of a year. Likewise, though there are, at any point in time, 1.8 million claimants getting benefits for 21 weeks, there might be 4.5 million over a year. Where as 2.2 million get benefits for perhaps an average of 40 weeks, which could mean as many as 2.8 million discrete cases over a year's time.
Using these assumptions, such a program could cost as much as $5.2 billion in lost income. One could apply this subsidy to top-line revenue rather than income, of course. The reason bottom line rather that top line might make more sense is that we have avoided revenue but retained cost here.
Then assume annual income for AT&T is about $6 billion; annual income for Verizon Wireless is about $7 billion, that Sprint has zero income at the moment and that T-Mobile (News - Alert) earns about $1.7 billion, all based on simple extrapolations from their most recently quarterly results. At that rate, such a program would represent half of annual income for the top four providers.
Still, the whole idea is to win customer loyalty, and 60 percent of unemployment claimants receive benefits for relatively short periods of time of less than 14 weeks. So assume the program really represents additional marketing cost, and that 85 percent of the subsidies are rewarded by 100 percent loyalty and a return to paying customer. Then the income hit might be $800 million over a year, as most customers would be "non-paying customers" for relatively brief moments of time.
Then there are the costs of administering such a program, assuming it could be done. Assume a 40 percent of lost revenue figure as the cost of administering such a program at the carrier level. That represents a $2 billion hit to earnings.
So the cost of such a program, could it be done, would cost perhaps $2.8 billion over one year. Against that, consider that Verizon (News - Alert) has quarterly income of about $1.7 billion, AT&T has about $1.6 billion and T-Mobile USA has about $425,000 in quarterly revenue. Sprint at the moment has no quarterly earnings.
There are many potential flies in this ointment. One might argue that since 30 percent of unemployment recipients are working again within five weeks, and another 30 percent are working again within 14 weeks, this represents an awful lot of overhead for relatively limited need. About 22 percent of claimants will be unemployed for 27 weeks or more, which is where the need might arguably be greatest.
You can draw your own conclusions about whether any executive would attempt such a program, and whether he or she would be willing to defend the impact on quarterly earnings.

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary's articles, please visit his columnist page.

Edited by Jessica Kostek

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