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
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