The Effect of Signal Quality and Contiguous Word of Mouth on Customer Acquisition for a Video-on-Demand Service

This paper documents the existence and magnitude of contiguous word-of-mouth effects of signal quality of a video-on-demand (VOD) service on customer acquisition. We operationalize contiguous word-of-mouth effect based on geographic proximity and use behavioral data to quantify the effect. The signal quality for this VOD service is exogenously determined, objectively measured, and spatially uncorrelated. Furthermore, it is unobserved to the potential subscriber and is revealed postadoption. For a subscriber, the signal quality translates directly into the number of movies available for viewing, thus representing a part of the overall service quality. The combination of signal quality along with location and neighborhood information for each subscriber and potential subscriber allows us to resolve the typical challenges in measuring causal social network effects. We find that contiguous word of mouth affects about 8% of the subscribers with respect to their adoption behavior. However, this effect acts as a double-edged sword because it is asymmetric. We find that the effect of negative word of mouth arising from poor signal quality is more than twice as large as the effect of positive word of mouth arising from excellent signal quality. Besides contiguous word of mouth, we find that advertising and the retail environment also play a role in adoption.