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Article Excerpt
Since Chorleywood's last report on churn and customer retention (published Summer 2001) the mobile telecoms industry has clearly suffered a huge shift in fortunes. Its success, grown on the mass consumer acceptance of mobile handsets and the huge uptake of prepaid services when they were launched later, was in many respects unprecedented. The impact of such phenomenal growth, and the future expectation that went with it, created a 'vacuum of belief' within the industry that mobile technology was a sure-fire winner which would continue to go from strength to strength--regardless of applications.
Investment in 3G technology, and the accompanying licences, was seen as a must for leading players in the market that were intent on being first to launch revolutionary content-rich services based on an assumption that it was what people wanted and would pay for. Was it a case of moving forward too quickly too soon?
At any rate, the massive investment in 3G licences soon began to worry investors, wiping millions off share values. The fear of having made a financial blunder gradually spread throughout the mobile operator community and has since created a culture that is more conscious of expenditure--naturally having a knock-on effect on the vendor community.
2.1 Mobile penetration at saturation point
As Figure 2.1 shows, mobile penetration rates in Western Europe have generally continued to increase. Countries such as Denmark, Greece and Spain have shown a dramatic increase in this time. Others, like Finland, Italy, Portugal and Sweden have passed 90% penetration while others still have topped 100% (Iceland and Luxembourg).
Of course those countries where mobile penetration rates are high are expected to suffer from higher levels of churn simply because there are no new customers to be grabbed by the service providers--the only way to increase subscriber numbers is to steal customers away from competitors. The exception to this is Italy where churn averages around 13% annually between the three cellcos.
According to research carried out by Sound Partners, it also becomes a lot harder for an operator to increase its share in these markets. This is proving to be the case--levels of churn have diminished in those markets where mobile penetration is around 80% which, with the exception of France, is a level that most Western European countries have already reached or surpassed.
The research would suggest that in order for an operator in a country with high penetration and with annual churn of around 48% (the average for Sweden) and a market share of 30%, to increase its overall market share by just ten percentage points over five years, that operator would have to achieve roughly a 41% share of all new connections over that five year period. But with a reduced rate of churn at 13% (the average in Italy) an operator with the same market share would have to own at least 50% of all new connections over five years to achieve the same growth in market share.
2.2 Cost control becomes a must
Clearly the telecoms market has suffered financially in recent times and the boom years have passed. However, one of the most noteworthy outcomes of the downturn has been the shift in attitude among operators with regard to the control of costs.
Many mobile operators have taken active steps towards saving money. At the beginning of 2003 for example, France Telecom-owned Orange announced a series of strategic changes in order to increase cash flow from about 5 billion [euro] (US$6 billion) in 2004 to 7 billion [euro] (US$8 billion) by 2005. The operator planned to cut costs by deferring 3G investment and streamlining operations in units outside the UK and France. It claimed it could produce 35-45% of the proposed savings by reducing both its capital and operational expenditures in the form of job cuts and office expansion.
T-Mobile International has used the opportunity presented by the unification of its subsidiaries (Germany, Austria, the Czech Republic, the Netherlands, the US and the UK) to cut costs and consolidate infrastructure. Such an approach, the company says, will allow it to coordinate common product launches, centralise IT procurement and create a seamless approach to marketing resulting in more cost-efficiency.
In an interview published in Billing Plus in February 2003 T-Mobile spokesperson Elaine Devereaux admitted that "... a degree of inattention to cost-cutting was to be expected because the company has only recently started expanding its footprint."
Job cuts have also formed part of its cost control--the company has vowed to slash 24,600 jobs across its entire business by the end of 2005. Further pressure from parent company Deutsche Telekom meant that T-Mobile was also expected to improve total annual efficiency for 2003 by 1.5 billion [euro] (US$1.8 billion). The cost efficiency targets particularly affected billing services, marketing, losses in accounts receivable and travel expenses.
Outside Europe, cellcos have been just as hard hit in terms of juggling their respective financial pressures. For example, MobileOne (M1), the second largest mobile operator in Singapore, has committed itself to streamlining and automating business processes and cost-effectively managing customer acquisition costs and churn. At the same time, it has also committed to making substantial capital expenditure (capex) in order to retain users and attract new ones with innovative products and services. Such a commitment to capex is in stark contrast to the strategies of many European operators, which have curbed both capex and operational expenditure (opex). However, M1 cannot afford to reduce its spending in a country where the penetration rate is over 80%--a level that limits its ability to grow its business by subscriber additions alone.
While many operators are putting in their best efforts to reduce costs and curb non-essential spending, the fact remains that reducing churn will also have a huge impact on their bottom lines. This is something that will be examined further later in this chapter.
2.3 ARPU, APPU or AMPU?
2.3.1 ARPU
Average revenue per user (ARPU) was, until recently, widely accepted by analysts and operators alike as a key performance indicator for comparing mobile operators' respective fortunes ever since subscriber growth began slowing. However it has lately been judged that ARPU does not represent the best indicator after all--one argument is that the majority of prepaid users tend to drag the figure down, thereby distorting the true worth of the operator's customer base. It can present a totally misleading view of the success of the operator's business. Although a high ARPU figure would suggest higher profits, it could be that high-spending users are generating low profits. ARPU also does not take into consideration the costs involved in maintaining the subscriber's custom--giving rise to yet another acronym, ACPU (average cost per user).
The ideal metric, according to some analysts, would be one based on lifetime customer value (LCV). It involves looking at the total cost of supporting the customer and comparing this with revenues generated prior to churn. It is particularly useful for churn management and customer retention processes in assessing whether a customer is worth inducing to stay.
However LCV is much harder to calculate. It needs to take into account a broader range of factors such as handset subsidies, the cost of acquisition (COA) and customer support costs--both in terms of customer care and network infrastructure--which then need to be balanced against the revenues generated from both outgoing and incoming calls.
By way of an example of how much operators are spending on acquiring new customers, it was reported in the industry press in 2003 that US operator Rural Cellular was spending $401 per new customer (although its most recently available results show this now to be reduced to $373), which meant that it had to spend $50 million annually just to replace customers it lost. With the company being over $1 billion in debt this kind of spend is surely unsustainable. Clearly though, with some of its larger competitors spending even more on COA (Sprint for example was reported to have spent $465 per head and Nextel even more, at $520 per new customer) Rural feels pressured to spend highly in this area in order to fight off competition.
While operators may already measure COA, calculating the cost of maintaining a customer over a period of time is more complex because it involves an audit of calls made to customer-care centres as well as a measure of the cost of providing new services.
Designing better indicators means having a better knowledge of how the business is performing. Although the raw data exists, it is often not assembled into a form that can be used for decision-making. Key indicators are often trapped in separate systems and departments, with the business managers unable to piece the bits together to gain a true understanding of what is going on. The problem is that while the mobile industry recognises...
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