Sorting the wheat from the chaff: how do we judge the viability of a wireless business?

We might think we all know our vital statistics – conveniently, often provided for us by the cellcos themselves - but how do we know they are accurate, or that they are the right measures to tell us how healthy the cellcos’ businesses are? Celona’s CEo, Tony Sceales, asks how can we identify the characteristics of a healthy wireless business and what the next-generation key performance indicators will be.

Numbers matter to cellcos – but only certain numbers. How healthy these numbers look determine their share price, how easy it is for them to raise finance, the pay and future of their chief executives and so on. These vital numbers are the all-important key performance indicators (KPIs) that include the number of active customers, the number of new customers, churn rates, ARPU, total revenues and subscription acquisition costs (SAC).

In July 2007 it was reported in the UK press that Vodafone was giving away prepay handsets and SIM cards that provided free calls and text messages from existing phones.[1] A Vodafone spokesperson was reported as saying that the move ‘was an experiment’ and may be rolled out nationwide.

There has been considerable speculation as to why Vodafone would do this. The answer is, of course, all down to vital statistics: each time a new phone is switched on, or a call made with a new SIM card, Vodafone can register a new customer acquisition and keep them on its figures for three months even if the phone or SIM card is only used once. This provides a temporary boost to subscriber numbers, and the company may also hope that some of these accounts will remain active. But Vodafone is not alone and other cellcos are using similar tactics. T-Mobile has been giving away free prepay SIM cards periodically for some time, and Orange is currently running a promotion that offers customers a free SIM Card with up to 1000 free texts each month and the ability to reserve gig tickets. 

Even without cellcos actively seeking to increase the number of customers with more than one SIM, there is evidence that this phenomenon is occurring naturally in mature markets such as the UK. For example, in a recent report ‘Multiple SIMs: Quantifying the phenomenon taking mobile penetration beyond 100%’ Informa Telecoms & Media found there were approximately 1.32 subscriptions to every mobile subscriber worldwide at the end of 2006. In other words, one in four subscriptions is someone’s secondary or tertiary subscription. And this results in revenue being spread across multiple SIMS, depressing and distorting ARPUs.

All of this raises questions about the KPIs we currently use to judge the performance of cellcos. KPIs such as the number of new customers and SAC are useful in expanding markets, but in mature markets they become less useful as rapid customer acquisition slows and subsides and ‘new’ customers have to be attracted away from competitors. In such markets churn rates become a more useful indicator of an operator’s ability to retain its subscriber base, although these give no indication of the cost of retention. Similarly ARPU can also distort the true picture, because it does not indicate how much profit a particular customer is generating. A customer may have a high ARPU but a low level of profitability, which might be because acquisition or retention costs were high or the customer may indulge in behaviour that adds to costs (for example, ringing customer services frequently) and so on.

In mature markets cellcos are facing three tough operational challenges. In the face of biting competition and technical evolution and convergence they must slash their cost base, increase their speed to market, and build in the flexibility that will enable them to respond to ever-changing customer requirements and an evolving market.

These challenges shift the focus to the underlying IT systems and their ability to support these new goals. Without an efficient infrastructure they will not be able to launch services quickly and at low cost, nor will they be able to respond to change. Not only that, but due to systems proliferation and the systems integration ‘tax’, legacy architectures are notoriously expensive to maintain. For example, in 2003 Orange had more than 20 CRM, billing and data warehouse platforms in Europe, and stated that rationalizing these systems was essential to its continued success in Europe.

Cellcos know how important it is to have IT systems that can cope with the new business environment they find themselves operating in, but risk being out competed by new entrants that are unencumbered by legacy issues. And while established cellcos may know exactly what they want to achieve, they find themselves in a quandary: how to transform their back-end infrastructure while also continuing business as usual with no downtime and no noticeable effects on the performance of existing systems.

To identify which cellcos will prosper in the next-generation environment we need new measures and we need to look for new characteristics. A measure that has been lurking in CRM circles for some time is transforming or supplementing ARPU with APPU (average profit per user), a measure that combines ARPU with the cost of supporting and retaining/acquiring the customer.

Possessing a consolidated, efficient and flexible IT architecture is certainly a characteristic that will help deliver success, because it enables the cellco to reduce its costs, support faster and lower cost service roll out, and to cope with ongoing change. The ability to roll out new services quickly in volume is emerging as a key next-generation performance indicator. Analysys’s Teresa Cottam comments: “Current performance measures such as ARPU are fairly gross indicators of the health of a telecoms business. In the future we will use a much wider range of measures that together give a more rounded picture, and one of these will be the ability to launch new services. This is critically important, as service providers that cannot launch services quickly, and in volume, will be out competed in the next-generation environment by those that can.”  But the key to all of this is the ability to transition quickly to a next-generation IT infrastructure, as the timeframe to do so can now be counted in months rather than years.   

Celona Technologies is the 'accelerated transformation' company. We specialise in building and implementing our patent-pending software product, Celona, globally to Tier 1 Communications Service Providers (CSPs), accelerating their business and system transformation. Celona’s unique technology allows CSPs to migrate to new operation and business support systems (OSS/BSS) using a business-aligned approach.