Is ARPU a valid performance metric? - Financial Perspectives - average revenue per user

Telecommunications International, Sept, 2002 by Matthew Secker

When mobile operators were rolling out their mobile networks in the 1990s, it was fairly easy to measure how well they were doing. You simply looked at the size of its subscriber base, compared it with other operators, and, roughly speaking, you were able to work out the level of its performance.

But as mobile markets hit saturation point and subscriber acquisition slowed down, another metric came to the fore as a way of measuring performance-ARPU (average revenue per user). It wasn't the number of subscribers that was considered paramount but how much revenue you could squeeze out of individual customers. And such has been the desire by operators to increase ARPU and impress the financial markets, they have willingly reduced the size of their subscriber base by churning off 'inactive' users (usually prepaid)-this, of course, has the happy side effect of ramping up those average revenue per user figures. But despite its growing use by financial analysts, how valid is ARPU as a barometer of a mobile operator's health?

Nigel Deighton, vice president and research director for Gartner, a telecoms consultancy, believes there's a danger of attaching too much importance to it, "ARPU has passed its sell by date as there's no real link between it and the margins of a mobile operator's business," he argues. "We need to get back-to-basics and look at raw profitability and ROI because they are far better indicators as to whether an operator is doing. well or not."

Deighton rightly points out that an operator with a comparatively high ARPU might not have a successful business because it may only have a small amount of subscribers "And having a low ARPU doesn't necessarily mean that an operator is generating negative margins," he says, "as it could have a large number of users."

Robert Grindle, a telecoms analyst at Dresdner Kleinwork Wasserstein, still believes, however, that we shouldn't write ARPU off as a way of measuring performance. For one thing, it can indicate how well an operator is doing with mobile data services. "Any sign of revenue generation that's revealed through ARPU will be looked upon very positively [by analysts] because it indicates what users are prepared to spend on their mobile phones," he says.