Data and voice ARPU have always dominated discussions about network operator performance. As ARPU is declining in both mature and global markets, data ARPU is seen as the main revenue source for network operators. Indicatively, data revenues contributed to almost 18% of total wireless revenues in the US in 3Q07 and to 21% of total revenues in Western Europe for 2007, according to Chetan Sharma and Informa, respectively.
Yet it seems that the focus in data ARPU may be overrated for two reasons; firstly, because the data ARPU mentality puts the emphasis on technology (e.g. advanced messaging, mobile TV and faster pipes), but not use cases (e.g. communicating to your closest friends, or living the brand experience of your favourite pop star on your phone). Secondly, because a new source of revenue is emerging that may eventually overshadow data ARPU in terms of industry focus.
Introducing Channel ARPU Both voice and data revenues are being mostly derived by billing the end user for anything from calls and texts to ringtone downloads and mobile TV. Increasingly however, revenues may be derived from third parties as a fee towards the party facilitating the delivery of mobile services through the last mile to the end user.
Channel revenues are not a new concept; Rental, revenue share or other fees for channeling services, products and promotions to the end user are commonplace in fast-moving consumer goods (FMCG) are well as mainstream media industries. And mobile services can be increasingly modelled after the business models prevalent in the FMCG industries, as the margins in manufacturing decrease and the value shifts in defining the customer proposition and controlling the delivery of services through the last mile to the end user.
We ‘ve coined the term Channel ARPU to refer to this new source of revenue. This is for a number of reasons; firstly, channel ARPU is derived from a new part of the pie, i.e. service providers wanting to tap into the wallet share of the consumer – and as such it’s important to distinguish this new source of revenue. Secondly because channel revenues are derived from attracting consumer eyeballs, selling to consumers and understanding consumer behaviour, activities which all take place in the last mile to the consumer (or last few inches if you consider the phone screen). Thirdly, because these revenues are most interesting if seen in a per-user context.
The many forms of channel ARPU Channel ARPU comes from a number of sources, most of which should be familiar to industry pundits:
– UI inventory leasing: commonly referred to as mobile advertising, UI inventory leasing refers to the ability to channel promotions and services throughout the handset real-estate, across the user journey. This is about advertising not only in-SMS, in-video, in-game and on-idle-screen, but about channeling content through every application on the handset, from the start-up screen through to dialer, inbox and main menu. In this case Channel ARPU is the ARPU derived by auctioning handset UI inventory to advertisers and promoters in the form of bunding with the handset or time-based leasing. For example, Android is means for Google to massively increase its ad inventory and derive Channel ARPU using mobile networks as a simple transport medium. (see previous article on the significance of Google’s Android for more details). The Blyk MVNO is another category leader here, where Channel ARPU is used to offset customer (and handset) acquisition costs.
– Retail sub leasing: leasing of shelf space to OEMs and service providers through the operator’s physical retail shelf space. Apart from special handset promotions this model hasn’t really been ‘productised’. However, the potential of selling services visually through the retail space is huge and hasn’t really been exploited (see earlier article on how to exploit the retail space as a point for visual service discovery).
– Service delivery leasing. Operators may make a revenue cut from handset OEMs by allowing OEMs to deliver services to the end-user. The example here is the revenue share deals that Vodafone, TIM and Telefonica have established with Nokia’s Ovi. Although officially unconfirmed, operator deals with Ovi involve bundling of Nokia Ovi services on a Nokia handset in return for a revenue share of Ovi revenues with the operator in the case of Vodafone this is music services only. Channel ARPU here is the revenues operators derive from Ovi.
– User analytics leasing. Increasingly, efforts like Nokia’s 360 and CarrierIQ use a handset agent to derive a diverse range of information on device usage, service usage, user profile, network usage, user social graph, etc. This is an underhyped area of mobile solutions which deliver unprecedented insight into mobile consumer behaviour; an opportunity which may ultimately result in creating a metrics aggregator that is to the mobile industry what Nielsen is to TV (and an area of interest here at VisionMobile, as we authoring a research report on this very topic). As in every industry, metrics on sales, performance and analytics on consumer behaviour can be a very lucrative business indeed. Channel ARPU therefore includes revenues which operators can source by leasing metrics and analytics to third parties (a direction where Verizon appears to be heading).
Last but not least, Apple’s iPhone can command a revenue share for providing network operators with access to high-spending customers. I have not classed this as Channel ARPU here as this revenue goes to the OEM, not the operator. Technically though, this may be called recurring subscribing acquisition costs (SACs) or a negative Channel ARPU as it flows out from the operator. As an indication of numbers involved here, Piper Jaffray calculated that AT&T pays Apple $18 per iPhone user per month. In a sense, this is a similar business model to the revenue sharing agreements that retailers practice with mobile operators, when a retailer signs up a new subscriber (I have heard of figures in the order of 15% of ARPU going to the retailer, which is modest compared to the iPhone revenue share estimates).
Adopting the Channel ARPU mentality It is also important to note that the Channel ARPU mentality is about growing wallet share based on collaboration with third parties. This is contrary to the traditional view of voice and data ARPU which is about growing wallet size based on customer ownership and exclusive provision of services to the customer in the all-too-famous one-stop-shop model.
In conclusion, Channel ARPU is a refreshing and meaningful approach to viewing per-user revenues derived by leasing access to the consumer through that last mile. However, much like data ARPU, network operators have to formalise and standardise the metrics by which Channel ARPU is calculated, if this new form of measuring ARPU is to be adopted.
Perhaps a task for the GSMA or the OMTP ?
[updated: mega-blogger and friend Ajit Jaokar argues that ARPU may be outdated providing some strategic arguments; ARPU does not translate to the web; or to multiple SIM ownership; advertising models relate to a service, not a user; the global web supercedes local operator strategies; and that customers have relationships with multiple service brands]
(Channel ARPU is trend 15 in our Mobile Megatrends 2008 series. Full presentation below.)