AMPU: Maturing Beyond ARPU

B S Jolly*

The Myth
If you ask any telecom professional what would be the most accepted
metric for measuring the success of mobile operators, the most likely
answer you would land up with would be ARPU (Average Revenue per
User). So much so that most of the research studies and pricing decisions
in telecos acknowledge ARPU as the deciding criterion.

While India has recorded the worlds highest annual mobile subscriber
growth (over 100%) from second quarter of 2003 onwards, the ARPU of
Indian companies has been the lowest (USD 10 along with that of China).
The industry has expressed dismay at declining ARPU on the presumption
that declining ARPU implies a loss in profits.

After investing huge sums of money in building world class networks and
market shares, telecom industry is maturing and all operators are now
finding ways to increase ARPU. The pressure on break-even periods and
profits in telecos has misguided even finance professionals without
realizing that by concentrating exclusively on ARPU, mobile operators
may actually be limiting their profits. Can the health of a company or
profitability of any operation be judged from its Revenues alone? Then
why should the telecom operations be different.

More thoughtful observers in the industry have started questioning the
metric. ARPU, by definition, is based on top line revenue and fails to
recognize the cost of acquiring & servicing a customer. A low ARPU
customer does not necessarily means a loss making customer. Nor does a
high ARPU customer imply consistent profits for operators. Therefore,
they are developing a lesser known but definitely better criterion, AMPU
(Average Margin per User).

The Definition
AMPU (Average Margin per User) is the difference between the revenue a
user generates and the cost of serving that user. The greater the AMPU,
the greater the profits of an operation. In order to have a winning &
sustaining growth, telecom companies need to develop a clearer picture
of the core economics of their operations and understanding the full
costs of providing services to its customers. It is very important to figure
out which customers can deliver the most profit and which ones are too
expensive to serve. In fact, when most of the mobile operators fight
aggressively for prepaid customer base, they are naively practicing the
AMPU theory. Although the ARPU of prepaid users is relatively lower
than the post paid users but they are considered far more profitable
because of lower Average Cost per User.

A multitude of cost factors may affect the AMPU of a given offering.
However, the most critical are Infrastructure investment, Network
Operating costs, Marketing & Advertising, Sales & Distribution and
Service Provisioning costs incurred for any offering. The AMPU analysis
basically involves identification & defining major cost variables, in
particular, those over which operators can exercise control and
quantifying the relative monetary importance of these variables. The
next step is to develop a model that enables operators to quantify the
likely impact of these variables on potential offerings and, thereby, to
estimate likely profits and when they can be expected.

The Advantage
In the initial phase of telecom market development, mobile operators
have spent huge amounts of money to acquire and retain new customers,
hoping that the revenues these users generated would eventually make
up for their costs. By over-emphasizing on market shares, and by
promoting service plans with free minutes, many operators have
created a time bomb by burdening themselves with too many customers
who consume a disproportionate share of the total resources. Also, the
myth that post-paid customers are relatively permanent customers is
getting busted by the increasing churns and average life on network
falling below 6 months. Now mobile operators are realizing that network
and available spectrum has limited capacity and it is one of their biggest
costs. Further, in order to equip more capacity particularly in urban
areas, the capex and opex costs grow exponentially. Also, as the
operators move to 3G arena, voice and new data based services share
the same capacity, the strain on networks is going to be far more
complex. Some researches have proved that customers who make
significant demands on network resources at peak times generate far
lesser revenue per minute than those who uses the network only
occasionally during peak periods. This reality has tremendous
implications for mobile operators. Rather than treating all customers
alike or on crude demographic segmentations, mobile operators would
necessarily have to distinguish customers based on the margins
generated by users. The customer segmentation based on AMPU would
help operators create powerful customer acquisition and retention
strategies. Only such a study of their customer base would lead to the
decision on which customers are worth pursuing, investing and retain.

Similarly, in order to grab the market shares, mobile operators have
been resorting to handset subsidies. However, the incremental traffic
may not generate the revenue needed to recover the cost of these
subsidies and incremental servicing costs. Also, a new service provision
may require additional or specialized infrastructure which may not be
justified by the incremental revenues. Increasingly, operators will face
the issue of balancing what end-users will pay for offerings against the
costs to deliver such offerings. Rather than developing please-all
service plans, operators must limit their services for current and
prospective users who will never be profitable. The basis of such
decisions will come from relating capex, sales costs and operating costs
to revenues generated from an offering; which is the underlying
foundation of AMPU analysis.

In order to improve the bottom lines in this competitive industry, the
mobile operators have always been in search of alternative revenue
streams other than voice traffic. Plethoras of data based services are
being introduced and the convergence of these services with voice is
said to be the next revolution in mobile telephony. However, in order to
produce profits in the long run, all these offerings would have to be
configured and priced rightly and offered to right customers. Further,
telecos would be innovating and differentiating their offerings on the
basis of various variables such as flexible network equipage, flexible
network load, roaming privileges, differential customer care services
etc. The AMPU model and analysis would support this goal of telecom
operators.

Conclusion
The Indian telecom market is going through the initial phase of rush to
sign up mobile customers for the sake of additional market share.
However, the companies that will survive and generate sustaining profits
on long term basis would be ones who swim against the industry tide and
develop value based strategies by moving beyond ARPU. Rather than
measuring their success in terms of number of customers or total
revenues, mobile operators would be required to define it by how well
they can identify and serve the customers who can generate more
margins and thus more profits.

*The author is a CA, CS, MBA with over 20 years of professional experience in Retail,
Telecom, Service & Manufacturing Industry. He is presently working as Head-Commercials
with Reliance Retail Ltd., Punjab/HP/Chandigarh, at Chandigarh.
E-mail: jollybs_in@yahoo.com