Please ensure Javascript is enabled for purposes of website accessibility

You’ll Never Guess America's Most-Hated Company (But You Can Probably Guess What Industry)

By Jamal Carnette, CFA – Jun 10, 2016 at 7:23PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

America's most hated company is from a familiar industry.

Image source: Getty Images.

Every year, the American Customer Satisfaction Index, or ACSI, issues their report gauging consumer sentiment across industries. This year, after surveying 12,710 consumers, the ACSI reported the company with the lowest customer satisfaction rating is a small, privately owned cable television, phone, and Internet service provider, Mediacom, with a rating of 54 (scaled to 100).

Mediacom may come as a surprise to most readers, unless you are unfortunate enough to be a dissatisfied customer. What is less surprising, however, is the industry Mediacom operates in. Historically, both the subscription TV and Internet service provider, or ISP, industries are rated poorly in the ACSI, and this year is no different: The lowest-rated industry in the ACSI is ISPs with an approval rating of 64, closely followed by subscription TV with a 65.

ACSI's founder and Chairman Claes Fornell best summed up the reason for disapproval of subscription TV and ISPs by comparing the industries to cellphone providers:

Innovation tends to be strongest in markets with multiple companies vying for consumer preference. There are numerous wireless carriers and plenty of different cellphones to choose from. The same is not true for pay TV and ISPs, where consumers are usually beholden to a duopoly.

Limited competition leads to lower satisfaction

Subscription TV and ISPs are industries with high barriers to entry. The capital expenditure costs to build out the required infrastructure generally prevent new companies from entering the industry, and make expansion by companies within the industry often uneconomical. As a result, in many geographical markets there are only one or two choices of providers with a high degree of market power and very little incentive to innovate, compete on price, or improve customer service.

Additionally, subscription TV and ISPs have taken steps to exacerbate limited competition. Last year, the Federal Communications Commission and Department of Justice essentially struck down Time Warner Cable's (NYSE: TWC) merger with Comcast (CMCSA -0.91%) due to "significant concerns that the merger would make Comcast an unavoidable gatekeeper for Internet-based services that rely on a broadband connection to reach consumers."  Soon after the announcement, though, Charter Communications (CHTR -0.88%) offered to buy both Time Warner, a smaller pay-TV provider and ISP Bright House Networks. The FCC signed off on the deal in May.

As a result of this merger, technology-focused website Ars Technica estimates Comcast and Charter will control nearly 70% of the high-speed Internet market. Additionally, AT&T completed its purchase of DirecTV last year and has since been looking at winding down its U-verse TV service and "nudging" customers to its DirecTV subsidiary.

Will Big Cable/Big ISPs have their John Legere moment?

Fornell's comparison between these two disliked industries and cellphone providers is interesting. The cellphone industry is even more concentrated than subscription TV, with the top four providers taking the lion's share of the market.

 CarrierSubscribers (Millions, as of Q1 2016)Net Adds (Millions, Quarterly)
1 Verizon Wireless 141.473 1.377
2 AT&T 130.445 1.781
3 T-Mobile US 65.503 2.221
4 Sprint 58.348 0.445
5 US Cellular 4.926 0.05

Source: Strategy Analytics/Fierce Wireless.

The difference, it seems, is not a lack of firms but the mind-set of the firms themselves. Three years ago T-Mobile's (TMUS 0.17%) CEO John Legere decided to vigorously compete within the industry, instead of acting as a supplier in an oligopolistic market. One of Legere's first moves was to ditch two-year contracts for month-to-month billing schemes.

T-Mobile has continued to roll out consumer-friendly features like its "Un-carrier" initiative. This seems to be working for T-Mobile: it led all cellphone carriers with a 74 rating, a massive six-point increase over last year's number, while adding tens of millions in customers to pass Sprint as the No. 3 carrier in the process.

There are risks in Legere's strategy of consumer-friendly giveaways. As in TV and ISPs, it takes heavy investment to grow and maintain networks, and a race to the bottom in terms of monthly costs and giveaways only makes investment more difficult. On the other hand, continuing to act as an oligopoly is safe -- until the industry is disrupted by a new entrant or a John Legere-type CEO who is looking to truly compete. Only then will subscription TV and ISPs significantly improve their customer satisfaction ratings. 

Jamal Carnette owns shares of AT&T.; The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.