Observations: Carriers – April 30, 2009

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9 Responses to “Observations: Carriers – April 30, 2009”

  1. Tomas - University Place, WA says:

    In the linked article about the “Cost of Supporting Mobile Broadband is Eroding Subscriber Profitability” is the following statement…

    “This problem is not unique; new products and services are introduced to generate greater ARPU (average revenue per user). However, the increased complexity of these services means that the cost to support them often increases, impacting subscriber profitability.”

    As an ex telco manager and currently just a Sprint/Nextel customer, I really do wonder about the constant industry focus on Average Revenue Per User rather than Average Profit Per User.

    I, for example, am a low bucks per month end user, BUT I am also a very low VOLUME user. Low volume to the extent that a couple of $30/month lines with Sprint end up costing me about $.29 a minute.

    So, while I’m a low “ARPU” what I pay compared to what I use makes for a substantial profit percentage for Sprint (revenue / cost = profit)

    So, can anyone explain why the industry insists on focusing on ARPU instead of profit?

  2. Russ says:

    Tomas,

    You make good points. It’s all a bit more complex than it appears on the surface.

    The investment community keeps a careful eye on ARPU because they are worried about whether the industry can sustain the kind of revenue growth that we’ve seen for the past decade. With almost everyone having a cellphone now, can that growth come from increasing subscriptions? With price-based competition driving down voice ARPU, can data ARPU growth make up for it? Analysts are primarily numbers people and ARPU is a simple number they can watch to figure out how to direct their clients about the growth prospects for the wireless industry.

    In your case, each of your lines doesn’t have an “ARPU” because that stands for Average Revenue per User and the “Average” and “per User” parts don’t really fit. When we think about any given subscriber, it is a question about how profitable that customer is.

    Instead, internally we much more use CLV than simply ARPU. CLV is customer lifetime value and it considers the lifetime profitability. It starts with the lifetime revenue from a customer – their monthly revenue times how many months they stay with us (so churn is an important metric) – and then subtracts the lifetime cost of the customer – taking into account the subsidy we eat when you get a new phone, our other costs of adding you as a customer (e.g. sales commissions to whoever sold you the phone), and our costs of serving you as a customer (your network costs, with data becoming an increasingly large component of the cost, the costs of providing you with customer care, etc.).

    There are broad things we do to improve CLV for all customers (e.g. give customers fewer reasons to call care, fix their problem the first time they call, use femtocells to reduce our network costs if possible and to reduce calls to care about coverage, use lower cost channels, like the web, to sell phones, etc.).

    There are also specific things we do to address specific sections of the customer base that we can identify based on CLV. Some of these are positive – such as introducing the Premier Loyalty Program (see http://newsreleases.sprint.com/phoenix.zhtml?c=127149&p=irol-newsArticle_newsroom&ID=1250915). Some are negative – such as the trouble we got into a few years ago when we kicked about 1,000 customers off our network who were very expensive to serve (see http://bits.blogs.nytimes.com/2007/07/16/sprint-to-pesky-customers-scram/).

    We also look at specific opportunities based on CLV. A big focus right now is on building bandwidth into other products. The best example is Amazon’s Kindle. As you can imagine, the ARPU from Kindles is much less even than what we get from you each month. But the cost is tiny (no subsidy, no sales commission, no calls to care, no voice usage, low data usage) so this is a low ARPU, high CLV opportunity that we’re going after aggressively.

    I hope that helps give you a glimpse into how the industry really thinks about key metrics and profitability rather than just revenue.

    Russ

  3. Tomas - University Place, WA says:

    Thanks for that explanation, Russ! I’m happy to see that internally it is much more than ARPU since ARPU has nothing to do with profitability.

    One can have a “fantastic” ARPU while losing one’s shirt, or a low ARPU with great profits if one’s costs are low.

    That makes me just HAVE to ask, though, about the “Loyalty Account Value” numbers that Sprint exposes to the public (and all those other little codes exposed to the public on Sprint.com web pages but never explained).

    My Loyalty Account Value is “008”, which is I assume close to the lowest rating. I’ve seen many other levels (yes, your customers talk about such things, too), but we really don’t know if an “007” is better or worse than an “008,” for example.

    We can understand most of the codes you attach to our accounts, at least to the extent of understanding what the identifier means, but we don’t understand our individual ratings, such as CreditClass = “G1,” “G7,” “G5,” “H2,” or “A2.”

    (I also see I’m “flagged” for at one time having contact with the Exec and Reg folks, too.)

    I apologize for asking about those internal codes – you probably consider them proprietary even though they are readily available to your individual customers – but those of us with inquiring minds would LOVE to know more about the codes we see, and what our individual assigned codes mean.

    Take care,
    Tom

  4. Tomas - University Place, WA says:

    Hello again, Russ.

    In doing a bit more thinking about “CLV” I find that the vast majority of MY contacts with someone at Sprint were because of something I should be able to do on my own as a customer, but couldn’t, for example set the flag to update my handset’s PRL. I’m sure there is a less expensive way to do this other than taking 10 minutes of a customer service rep’s time.

    Another thing I wondered about is how accurately Sprint/Nextel tracks the customer as opposed to the telephone numbers.

    When I had an opportunity to get a better deal with a “new line” than I could as an old established customer, I went with two new lines, then a month later canceled my two old ‘out of contract’ lines that I’d had for years.

    On those old out of contract lines, the handsets I used were for the most part NOT subsidized by Sprint, as I bought them used, on the open market (I actually wanted units that Sprint no longer sold).

    I suspect, however, that my current separate account on a different billing system with different phone numbers shows nothing of the old accounts.

    Just using my own experience, I’m wondering how many other long term customers may have CLVs that do not necessarily reflect their actual history with Sprint.

    In any case, I continue to hope that Sprint can turn around the hemorrhaging of customers and continue to provide ME the excellent service they provide (yes, that’s a selfish reason, but still gets you good wishes).

    Tom

  5. Mehul Jain says:

    I was thinking about two of the articles mentioned here, & have the following observations:

    – Services like Loopt and Google Maps Latitude, are offering services for free that are currently being provided on a paid basis by Telecom Providers (for example, Family Locator vs. Google Latitude). Also, as phones become more & more third party software friendly (like Iphone, blackberry, Nokia Symbian based phones), Location based apps will become more abundant, and may be the role of the Telecom provider will get limited to service enabler. However, this should still boost the data revenue, & this increase the ARPU.

    A solution might arise if Telecom providers could charge a small commission to software developers for using the already built LBS infrastructure. This way, small startups etc. will not have to invest a lot of money in building their own platforms and could just leverage the Telecom’s capabilities that exist today.

    – The PC retailing at a discounted price with data plans is a relatively new trend. This is providing Telecom providers with an additional revenue stream from data services at a time when the mobile market is close to saturation. However, I feel that it’s still just appealing to a very niche segment right now. For example, if a family has 2 laptops & a desktop, then it might not be practical for them to have multiple internet connections for home.

    May be with the introduction of 4G services, things could appeal to a much wider mass. If it becomes easy enough for a family to share the network connection (like in case of DSL/cable), may be they’ll start “cutting the chord” for their DSL services & just go 4G!

  6. […] Originally Posted by Inside.Sprint.Now Here’s what you’re looking for: Each of those value meters turn green as value increases. i.e. 8 = 8 green bars. Here is a worded explanation that I found from Russ on Mcguire’s Law: "CLV is customer lifetime value and it considers the lifetime profitability. It starts with the lifetime revenue from a customer – their monthly revenue times how many months they stay with us (so churn is an important metric) – and then subtracts the lifetime cost of the customer – taking into account the subsidy we eat when you get a new phone, our other costs of adding you as a customer (e.g. sales commissions to whoever sold you the phone), and our costs of serving you as a customer (your network costs, with data becoming an increasingly large component of the cost, the costs of providing you with customer care, etc.). There are broad things we do to improve CLV for all customers (e.g. give customers fewer reasons to call care, fix their problem the first time they call, use femtocells to reduce our network costs if possible and to reduce calls to care about coverage, use lower cost channels, like the web, to sell phones, etc.). There are also specific things we do to address specific sections of the customer base that we can identify based on CLV. Some of these are positive – such as introducing the Premier Loyalty Program (see Sprint | News Release: Sprint Thanks Customers with Launch of Exclusive Program that Provides Unique Perks and Instant Rewards to Loyal Customers). Some are negative – such as the trouble we got into a few years ago when we kicked about 1,000 customers off our network who were very expensive to serve (see Sprint to Pesky Customers: ?Scram? – Bits Blog – NYTimes.com) ." – McGuire?s Law Blog Archive Observations: Carriers – April 30, 2009 […]

  7. Tomas - University Place, WA says:

    One more comment, this time relating to the linked article “Report: Prepaid growth to outpace postpaid additions.”

    When my current two year contract is up (a few months), I’ll be re-assessing my current plans (two SERO 500s).

    I plan on keeping only one of the two SEROs, and moving the other to something else – most likely a Virgin pre-paid account that can be run for much less than half the price of the SERO.

    Only if Sprint can come up with something that DIRECTLY competes with the currently available Virgin plans (which use the very same Sprint network…) will that second line remain a Sprint post-paid.

    Let me explain… That second line is my 83 year old mother’s cellphone. She averages about 20 minutes a month on voice calls (mostly long-distance), and uses NONE of the other services available. To her it’s a voice phone she can carry around and that’s all it is.

    Paying for unlimited web and text services on her phone does not buy me anything I need to buy. Paying for nearly 500 unused minutes a month buys me nothing.

    So, less than two years ago I had four Sprint post-paid numbers. Now I have two. By the end of this year I may be down to just one.

    …and that is from a person who LIKES Sprint.

    Tough times, indeed.

    Hopefully Sprint will get away from the idea it has somehow wed itself to that EVERYONE needs EVERYTHING on their service. Not everyone does, and those who do not very likely end up resenting not being able to just buy what they want and need.

    I hope someone is actually listening – you don’t have much time.

  8. Russ says:

    You know, Tomas, I can’t really argue with this one.

    I agree with your logic on the type of plan that makes sense for your mother.

    Clearly, we will not make as much money from having her on Virgin as having her on a Sprint post-paid plan, but we also can’t be all things to all people. Our wholesale model allows us to keep customers on our network who don’t fit our targeting profile, and although our revenue (ARPU) from Virgin customers is much less than post-paid, the profitability is good – getting back to our previous discussion.

    Strategically, we need to make decisions on how we get the greatest benefit from how we invest our limited resources. Focusing our retail efforts on customers for whom we can create differentiation allows us to get the most bang for the buck. The question you raise is whether that’s a big enough slice of the market (your 4 lines down to 1 example). By using wholesale partners to serve as much of the rest of the market as possible (very profitably) is a way for us to continue to participate in a low-resource way (and keep that money out of competitors’ hands).

    Thanks,

    Russ

  9. Chris says:

    I have a question.

    With the churn rate being what it is, and Sprint trying to stop the exodus, I’m wondering why Sprint doesn’t offer better incentives to existing customers to keep them? Most deals are available to new customers… which don’t seem to be coming regardless that the “everything” plans are more competitive?

    Has Sprint considered the amount of customers they could obtain at high schools and colleges?

    Why not offer a special rate plan for high school graduates, as well as for college students? Maybe even subsidized by the schools or universities.

    There’s a huge market there is there not?

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