Every now and again the press raises that old chestnut about the value of using ARPU (average revenue per user) as a valid metric of service providerâ€™s performance. Â Itâ€™s usually on low news days! Â It raises the question that if ARPU is not the right metric to determine and measure an operatorâ€™s success, what is?
The biggest issue with ARPU is the inconsistent way it is measured. Â It is used by management to convince boards and investors of performance but this is fraught with danger because it is not only dead easy to calculate it is also easy to manipulate. Â Some simply divide the total revenue for a period, usually one month, by the number of â€˜activeâ€™ users. Â The definition of user is usually a live â€˜accountâ€™, be it prepaid or postpaid and may include voice, data, etc. This obviously makes the revenue look better than dividing by the number of services being subscribed to, e.g. one user could have multiple services and dividing revenue by the larger number produces a lower ARPU figure, not good. Â Precisely because of the different ways operators do the calculation is why it is such a poor metric.
ARPU also changes as an operator matures. Â When it first enters a market and penetration rates are low, people are generally keen to sign up for services, and ARPU is high. ARPU is often used correctly at this stage, because one connection generally equates to one subscriber. Â As penetration grows, more and more users come from low-spending segments, so ARPU starts to drop. Â In the final phase, saturation forces operators to offer special deals on extra services, some free, so ARPU falls further. Â To exacerbate matters further, poor management of inactive subscribers, i.e. disconnection after a reasonable period of inactivity, lowers the calculated ARPU even further.
Operators generally provide ARPU figures voluntarily and because ARPU as a measurement isn’t subject to regulations such as the U.S. Generally Accepted Accounting Principles (GAAP), the calculation varies from one company to another. Â As a result, comparisons of different operators’ ARPU figures aren’t really meaningful, nor are figures such as AMPU (average margin per user) for the same reasons. Â A high ARPU figure doesn’t necessarily mean an operator is profitable, either. Gartner released findings as early as 2005 showing that profitable operators can have relatively low ARPU.
By far a much better metric, but more difficult determine is EBITDA (earnings before interest, tax, depreciation and amortization). Â You know an operator is serious when it quotes this figure because it is based on hard accounting data, but it tends to be only calculated quarterly or annually at the same time accounts are released publicly. The Gartner report also showed that most of the mobile operators then surveyed in AsiaPac with high EBITDA margins had relatively low ARPU. Â Even more fuel for the ARPU funeral pyre?
So, if ARPU doesnâ€™t work, is EBITDA the answer or is there another metric, relatively easy to calculate, that should be adopted? Â Any suggestions?