Now that the Year of the Golden Calf Ox is shaping up to be the year when all three of China's mobile operators - China Mobile (NYSE:CHL), China Unicom (NYSE:CHU), and China Telecom (NYSE:CHA) - will deploy third generation mobile networks, or 3G, it is useful to explore the extent to which 3G networks elsewhere in Asia are living up to 3G's promise to raise average revenues per user (ARPU).
The short answer is "pretty good." As the operators find ways to deliver new services for which users are willing to pay, the revenues are going up.
Nice revenue. Where's the profit?
The problem is that for some operators, particularly those in competitive markets, those increases are not translating to profits. To give but a single example, one well-run operator in Singapore has watched average revenue per user rise 41%, from $41 to $58 as a result of adding 3G services. Leaving aside the sunk cost in the network, profits should have risen accordingly.
Not so, according to an executive of the Singapore operator speaking at a recent industry conference. That growth in ARPU is not coming with an attendant growth in profits, because so much of the increase in revenues is being offset by the cost of acquiring content.
Given that the executive was speaking to a room filled in partly by content providers, I would bet he assigns an unfair portion of the problem to content. I would wager that increased marketing and management costs that come with building awareness and usage of the new systems are also digging into profits, along with other fun things like amortization of network cost.
Regardless of source of the costs, however, the issue is clear. If executives, investors, and analysts are using ARPU as a measure of success for 3G networks, we are all looking at the wrong number. Revenue only tells half the story.
Building a Better Yardstick
What we really need is a metric that captures both the additional revenue and additional costs attributable to 3G services, and that still describes the additional net gain for an operator from 3G.
Two measures would provide a more accurate - and more telling - yardstick. We can either look at average margin per user (AMPU) or average profit per user (APPU).
AMPU would subtract the costs of acquiring the user, providing service to the user, and keeping the user from switching to another network from revenue. As such, it would be a better indicator of whether 3G services were living up to their promise to the overall operator business. APPU, which would subtract all operator costs, would help determine whether the health of the enterprise was improving or declining as a result of 3G adoption. The measure takes into account such things as investments in network and business development that margin does not take into account.
I like APPU somewhat less than AMPU, but I think the former is still useful because it would account for the different ways each carrier accounts for the different costs involved in the network and in service delivery. Either would be better than ARPU, and the use of both AMPU and APPU in some combination would give a much better snapshot of the business.
If tracked over time (as adoption grows, technology matures, and competition drives down the costs of services and content), the two measures would give an indicator of how the fundamentals are improving.
More than Accounting
Okay, I'll grant that this seems like an esoteric question best left to accountants and others. In truth, though, this has a significance that goes beyond the ken of analysts and investors.
If we start using our two new metrics even alongside ARPU, we start getting a feel for how much the carriers are spending in order to get each additional dollar or revenue. While this sounds even wonkier, this little measure is going to be especially critical for China.
Chinese carriers tend to be more focused on revenues (for whatever reason) than on either profits or marginal costs. This revenue focus gets operator executives thinking "if I can keep a higher percentage of the revenue of a value-added service delivered on its network, I would rather squeeze out the outside provider and offer the service itself, even we have to bear the full costs of the service. That way I keep the larger share of revenue, and, after all, that's how my success is measured."
If, on the other hand, the operators were judged not only on ARPU but on AMPU or APPU, the pressure to deliver more services at a lower cost could force the carriers to evaluate whether offering a service themselves would deliver a higher profit, rather than whether it would increase revenues in exchange for even higher costs.
Once you start looking at the costs of delivering a service, rather than just the revenue, the best service provider is the one who can deliver the most dollars with the least cost.
In other words, you go with the guy who makes you money while you spend nothing.
Service Providers, Listen Up
What I suspect is that this kind of business analysis would be a good thing for independent value-added service providers (VASPs). It would enable them to make a business case for long term partnership, even when the service provider starts making a lot of money, to make the case that it is better to have a cash-cow than a cost-center, especially because network operators have enough cost centers as it is.
I also suspect that the operators will not come to these conclusions on their own, but will only be compelled in that direction when the investor and analyst community starts demanding it.
And that means that once VASPs have their business cases perfected, it behooves them to start making the case, individually and collectively, to change the way operator revenues are evaluated. If investors and analysts can see the wisdom of doing it the VASPs way, they can be a powerful ally in getting China's carriers to stop steamrolling the VASPs out of business.
China needs efficient carriers, not just massive carriers. It serves everyone if we start measuring them accordingly. Otherwise the benefits of the government's mix-and-match game with the nation's telecom assets will produce little more than price wars and mutually-assured value destruction.