You’ve got to know when to hold ‘em

I guess nobody’s missed it – The smartphone era is upon us. Towards the end of 2010 we saw operators in some countries reaching 90% of new sales being smartphones. Penetration is rapidly increasing in light of share of sales and operators can no longer choose to be or not to be in the smartphone game – if they want customers they need to offer them in a wide range. Thus, we are clearly in a customer acquisition mode in most mature markets. Fighting to get your share of the smartphone growth is vital to stay competitive in the market.

Towards the end of 2010, we’ve seen the first impacts of this growth on operator financials. In the financial reports two things stand out, Average Revenue Per User (ARPU) and Subscriber Acquisition Cost (SAC).

ARPU – Several operators have reported smartphone users have higher ARPU or spend.

  • Tele2 in Sweden quoted 20% higher spend for a smartphone user than a non smartphone user in Q4 2010
  • TeliaSonera quoted 30% higher ARPU for a smartphone user in Q4 2010
  • Vodafone has seen an increase range from €2 to €10, depending on type of customer when switching to a smartphone (low, mid and high end spenders)
  • AT&T has seen significant (up to 70%) higher ARPU for an iPhone user compared to a feature phone user

Subscriber Acquisition Cost – not often directly mentioned or defined in the reports but seen as part of COGS or total OPEX.

  • In the Tele2 Q4 report we saw EBITDA margin dropping in Sweden, despite the higher spend per user – most likely due to a higher acquisition cost
  • AT&T has, during the time of iPhone exclusivity, had a clear upside on Verizon with regards to adding subscribers, but also suffered comparatively on the EBITDA margin

Why is this?

Well, the SAC increase comes from more expensive devices being subsidized and an increase in campaign spends to capture the customers in this highly competitive market.

So, higher ARPU on the one hand but higher SAC in the other means that you have great chance of making more money but you’ve also increased the case sensitivity to churn. To benefit from the higher ARPU you need to keep the customers long enough to justify the increased SAC. Yes, two year plans is one way to manage it but it cannot stop there. If everyone changed operator after two years that would mean 50% churn rates. Few operators and markets have such high churn numbers, meaning that the two year plan is merely a lowest acceptable limit. Operators need to take measures outside plan lifetime.  A structured approach, understanding what drives churn in the smartphone era and swiftly acting to put the right retention schemes in place in a broader sense will be vital.

Every operator needs to understand the impact of parameters such as

  • Network quality – coverage, speed, reliability, latency, attach rate success etc.
  • Customer Care quality – the quality of help, time to get it and attitude of representatives
  • Points of Sales – how well do the sales channels educate, explain and guide the users in what the plan includes and how the device works?
  • Bundling or add-ons – how important is bundling of applications, different connections and cross platform content?

We are utterly convinced that retention management will be the key element for profitability in the smartphone business war. And it only just began.

Sources: Tele2, Verizon, AT&T, Vodafone, TeliaSonera websites, annual reports, investor presentations

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