Yesterday, Colin Gibbs, at GigaOM, wrote a great blog: Q4 Wireless Scorecard: It's Good to be King, in
which he provides a breakdown of key figures from the major US wireless
operators. Extracting and consolidating this information is incredibly
useful, and props to GigaOM for so doing, but a deeper dive seemed to be
in order.
There's a lot of confusion around concepts like "churn", "ARPU", and
"Net Adds", and more importantly, how do these translate into the value
of a subscriber?
Churn is simply the rate of turnover within a subscriber base. An
easy calculation to perform is to derive the average number of months a
subscriber will remain with an operator. Simply divide 100% by the churn
percentage, to arrive at this number. The lower the churn rate, the
longer each subscriber will generate revenue and cash flow for the
operator.
Of note, is
the huge variation in Average Subscriber months that churn percentage
makes. Why is this important? Well, the average customer term dictates
the expected revenue that will be derived by each subscriber over their
lifetime. Of course, the greater this number is, the more profitable a
customer will likely be, as customer acquisition costs (marketing,
handset subsidies, etc,) are able to be amortized over longer periods of
cash flow.
It's also
interesting to look at ARPU, a number that is often pointed to as being
indicative of profitability. But this is a simplistic view of the
subscriber, in that the value of a customer is much more a
function of churn than it is ARPU. GigaOm provides the ARPU per user
broken out by carrier:
There is some variation across wireless operators, but still within a
fairly tight range. However, when you take ARPU and multiply it by
Average Subscriber months, the picture starts to change dramatically. 
While this
doesn't show profitability per subscriber, it is easy to eyeball this
and determine that customer acquisition and support costs erode
profitability significantly for several of the operators, even without
taking into account the fixed costs associated with spectrum and CAPEX
to build out their networks or migrate to new technologies.
Lastly, Net
Adds is an important metric to help determine the long-term viability of
a company. Think of each Net Add as "X months of Future Revenue" (or
cash flow), where X is calculated from the churn %. The numbers shown
are the absolute numbers. A percentage view is quite different, with
Leap Wireless Net Adds equal to 6% of its Total Subscribers, while
Verizon and AT&T Net Adds equal 2.41% and 1.07% of their Total
Subscribers respectively.
So what
happens when you add it all up? Well, in absolute terms, the Lifetime
Expected Revenue of the Net Adds in Q4/2009 looks like this, which may
support the ROI that Verizon is seeing from its huge marketing and
advertising push in late-2009.
Growth is a
result of a virtuous cycle. Low churn rates drive lifetime subscriber
revenue, much more so than does ARPU. Higher revenue per subscriber
means more to invest in sales, marketing and new technologies like 4G.
Once an operator starts churning its install base, profitability takes a
huge hit, as does its ability to invest in customer acquisition and new
technologies. It's a downward spiral that is very difficult/expensive
to reverse. Clearly, this illustrates why the big keep getting bigger
and why the AT&T and Verizon marketing battle is with us to stay.
That's my
.02!
Martin Suter
