White Paper

AMPU and not ARPU

The better metric for Wireless Industry

In this White Paper Nupur Jaju, a

Business Analyst at Satyam
discusses how AMPU makes a
superior performance measure
than ARPU
White Paper
AMPU and not ARPU

CONTENTS

1. ABSTRACT ........................................................................................ 3

2. INTRODUCTION................................................................................ 3

3. WHY AMPU…?................................................................................... 3

4. ARPU REVENUE DRIVERS.............................................................. 4

5. AMPU COST DRIVERS...................................................................... 5

6. COST ANALYSIS................................................................................. 6

7. COST ALLOCATION........................................................................... 7

8. COST ALLOCATION METHOD.......................................................... 8

9. CONCLUSION..................................................................................... 9

10 FURTHER SCOPE OF WORK .......................................................... 9

11. REFERENCES ................................................................................... 10

12. AUTHOR'S PROFILE ....................................................................... 10

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ABSTRACT
The focus of this paper is the use of AMPU (Average Margin per User)
by Telecom Companies as a better metric of performance rather than
ARPU (Average Revenue Per User). Revenue earned and the cost
incurred to earn them are brought together to give a clear measure of
the profit made. Nupur Jaju is a Chartered
Accountant with two years
experience in the Telecom industry
Revenue and Cost drivers are also highlighted to conclude on the
and is currently working with
AMPU calculation. Various cost components have been analyzed to Satyam Computer Services
understand the ratio of each component to the total cost incurred. A Limited, as Business Analyst in
brief elaboration on different cost allocation methods has also been Telecommunications as part of the,
Business Intelligence Practice
done to bring more clarity to the costing side of the telecom
companies.

Introduction
ARPU stands for Average Revenue per User. It is a powerful and
extremely useful indicator of just how well a telecom company
accesses its customer’s revenue potential. ARPU is commonly
calculated in standard mathematical fashion, by dividing the
aggregate amount of revenue by the total number of users who
provide that revenue. In mobile telephony, ARPU includes not only the
revenues billed to the customer each month for usage, but also the
revenue generated from incoming calls, payable within the regulatory
interconnection regime. The companies that only track ARPU will
most likely want to know its profit potential in broad terms.

On the other hand, AMPU stands for Average Margin per User and is
the difference between the cost of serving a user and the revenue that
the user generates. AMPU can be positive or negative. The greater the
AMPU, the greater the profit.

3. Why AMPU…?
Though ARPU and AMPU are both performance measures when it
comes to profitability, AMPU gives a clear picture.

AMPU = ARPU – Average Cost per User

Since ARPU does not take into account the cost incurred to provide
the service, it makes it an insufficient metric. Hence without the cost
consideration, a decision made solely based on Revenue can be
misleading and operators may limit their profits by focusing
exclusively on it.

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Any Service provider can offer new services and increase their ARPU.
However, a high ARPU does not always mean a high margin As the
total cost of offering attractive services must be taken into account.
An operator with the smallest cost can actually make more margin
than one with the highest ARPU.

Telecom analysts are traditionally highly focused on ARPU, due to the

fact that the typical telecom company has huge infrastructure costs
that need to be serviced by a considerable ARPU.

Taking a situation of two service providers with the same subscriber

base of 150000 and varied revenue and cost

Service Providers A B
Revenue 110,00,000 90,00,000
Cost 40,00,000 10,00,000
ARPU 73.33 60
AMPU 46.66 53.33
Table 3.1

This simple example is taken to explain how misleading a decision can

be if it is made on ARPU and not AMPU. It is clear by the above quoted
example shown in Table 3.1 that even though the ARPU for a service
provider be low, a lower cost can make it more profitable when
compared with other provider with higher ARPU and higher cost. Thus
by stressing on the margin produced per sold unit and not the amount
of cash (Revenue) earned from each customer, one can afford low
volumes and still have a healthy company.

Low revenue per user need not preclude a positive AMPU. In other
words, low revenue users can still be profitable as long as ARPU
exceeds average cost per user. For example, prepay customers have
been widely assumed as unprofitable. Prepaid customer may fetch a
low ARPU; however they may generate higher revenue per minute
than do postpaid customers as the prepaid market segment rates are
typically higher. In addition, they require no handset subsidies, no
billing and collection costs, and produce minimal bad debt. For these
reasons, they can generate positive AMPU and with that higher
profits.

The ARPU figure should not be confused with the average margin per
user (AMPU), which is calculated on the basis of net profit rather than
total income. In recent years, some telecommunications carriers have
increased their reliance on AMPU rather than ARPU so as to maximize
their returns.

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4. ARPU - Revenue Drivers

Average Revenue per User (ARPU) is a financial performance
benchmark in the telecom industry that measures the average
monthly revenue generated per customer. Originally it was used by
telephone carriers and is now used by carriers providing services such
as Internet connection, cable services, cell phone, pager, VoIP services
and so on. Before we talk about various Cost Drivers, we need to
discuss Revenue Drivers. As AMPU takes into consideration both
Revenue and Cost so to appreciate it better we need to focus on
Revenue factors.

Non Recurring Revenue: These are the revenue sources that are one
time charge for the customer and are to be recovered as soon as the
customer enters the network.

Ÿ Activation Charge
Ÿ Security Deposit

Recurring Revenue: These are recovered as and when the customer

makes a usage or avail off certain Rental services.

1. Rental Income
- Monthly Rentals for the offering
- Rentals for the VAS (Value Added Service) such as CLIP, CLIR, VMS
(Voice Messaging Service) , Itemized Bill, Caller Tune, Promotional
offers

2.Usage based Revenue

Ÿ Voice
- Airtime revenue – Outgoing
- Interconnect Revenue – Incoming
Ÿ Video
Ÿ Messaging
- SMS
- MMS
Ÿ Content
- Download
- GPRS
- Special numbers
- Data Download

Ÿ Internet Access

3. Roaming Revenue

Ÿ Roaming Access Fees

Ÿ Roaming Call Charges

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5. AMPU – Cost Drivers

Acquisition Cost: All expenses incurred to bring a potential customer
into its network. Examples: Subsidies, Dealer Commissions, Marketing,
Sales and Distribution

Capex (Capital Expenditure): Incurred when an Operator spends

money either to buy fixed assets or to add to the value of an existing
fixed asset with a useful life that extends beyond the taxable year.
Examples:

Ÿ Civil Expenses
- Acquisition
- Fabrication & Foundation ?Erection of Site
- Electronic & IT Equipments
Ÿ Retail Outlets
Ÿ Infrastructure
Ÿ Branding

Opex (Operating Expenditure): Expenditure that an operator incurs

for running a product, business or providing a service. Examples:
Ÿ Service Opex: Customer Care, Billing and Collection, Service
Creation, Administration
Ÿ Network Opex: Coverage, Capacity, Site running expenses, Site
Maintenance, transmission cost.
Ÿ Others: License Fees & Spectrum Charges, IT Costs, Interconnection
User Charges (IUC), Personnel Expenses, Depreciation Charges
Spectrum Charges
Ÿ Charges paid to DoT (Department of Telecommunication) for
allocation of spectrum for transmission of signals
Ÿ GSM Operators – Charged at 4% of Revenue
Ÿ CDMA Operators – Charged at 2% of Revenue

License Fee
Ÿ Entry Fee paid to DoT for getting license to operate in the market
Ÿ Paid Quarterly based on the Adjusted Gross Revenue (AGR)

Interconnection Usage Charges (IUC)

Service Provider interconnects their network for forwarding calls
made by their customer to customer of other operators or vice versa.
Thus Operators have to pay charges for network usage based on the
guidelines announced by TRAI. Currently IUC is fixed at 30p/min which
is paid to the terminating operator.

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The cost factor for each of the operators across the globe cannot
match as it is not generic and varies from geography to geography.
For example, License Fees or the spectrum charges which is more of a
regulatory charge would depend on the regulation of a particular
country Hence in the above quoted section, effort was to generalize
the cost factors, though few Indian scenarios have been taken.

AMPU Calculation

Total Revenue (R) = Total Recurring Charges

= Total Rental Income + Total Usage Charges +

Roaming Revenue

Total Cost (C) = Total Acquisition cost + Opex + Capex

Total Margin = Total Revenue – Total Cost

AMPU = Total Margin/ Number of Subscribers

6. Cost Analysis
A glimpse from the Indian Market

Figures for the financial year ended 31st March 2005

Thus the major cost incurred by a telecom operator is licensing and

network, which accounts for approximately 50% of the total costs.

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7. Cost Allocation
Cost allocation is a method used to determine the cost of services
provided to users of that service. It does not determine the price of
the service, but rather determines what the service costs to provide.
It is important to determine the cost allocation of the services, in
order to determine a justifiable fee/charge/ for those services.

Included in cost allocation are direct, indirect, and incremental costs.

Direct costs, or separable costs, are costs that are related to a single
type of service and are related to one type of output or user such as
billing charges are only attributed to postpaid subscribers.

Indirect costs, or common costs, are related to more than one type of
service, such as, setting up a SMSC amounts for both postpaid and
prepaid subscriber base. Hence such common costs are to be
allocated to determine the cost attributed to each of the different
services.

Incremental costs change with the level of output produced.

Incremental costs measure changes in output, e.g., due to rise in the
number of subscriber base in any one particular area, a new BTS is set
up for better coverage and to avoid congestion would be an
incremental cost for those increased customers. It includes both the
directly and indirectly attributable cost of a service and excludes any
costs that are joint and common to the provision of a specific network
service.

8. Cost Allocation Methods

A.Stand Alone Cost (SAC)
It considers the cost per service as if there was only one service
offered. All the shared/joint costs and common costs are added to the
direct cost of the considered service and are allocated to that service.

B.Fully Allocated Cost (FAC)

This method allocates all the costs to all the services proportionately.
Direct costs are directly attributed to each cost consuming service,
and shared/ joint/common costs are attributed through the use of
allocation keys. The toughest part of using this method of allocation is
to find the right allocation key for all costs.

C.The Long Run Incremental Cost (LRIC)

This method only measures the change in total costs when a
substantial and discrete increment or decrement in output is
generated. This increment can be a newly offered service and also an

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increase in output of one service.

D.ACTIVITY BASED COSTING (ABC)

ABC is a unit of measurement to describe the organization activities,
the resources consumed by those activities and the products and
services generated by those activities. ABC is not just a way to
describe cost. It is also a management technique that enables fact
based and quantity based managerial decisions.

Instead of one stage assignment where costs are assigned directly to

Product and services, ABC assigns costs from the general Ledger
(Resources) to Activities and then is assigned to Product and Services
(Cost Object). Taking a live example of setting up of a BTS, the amount
spent on setting up is taken from general ledger and then is assigned
to Network activity and then is allocated to Prepaid and postpaid
subscriber base. Thus ABC turns Traditional accounting view to an
Activity based view.

The general conception that persist with people makes ABC and
LRAIC (Long Run Average Incremental Cost) conflicting but bringing
light to the fact, ABC has no argument with LRAIC or FDC (Fully
distributed cost).

Cost allocation basis to calculate Cost to serve for Postpaid and

Prepaid

COST Basis of allocation

Network Cost Minutes of Usage
Call centre cost - Outsourced No. of calls
Retail Outlet Ratio of Customer base
General & Administration Ratio of Customer base
IT Ratio of revenue

9. CONCLUSION

Many telecom companies find ARPU to be a prime indicator of profit

potential. However it is seen that ARPU has some dangers as well.

Over the past decade, the industry has expressed dismay at declining
ARPU, notwithstanding actual increases. Part of this dismay stems
from the assumption that declining ARPU implies a loss in profits.
Thus when companies fail to focus on the right parameters, it might
end up taking decisions on incorrect reasoning.

AMPU provides a basic criterion for measuring the success of wireless

operators. By focusing on AMPU, operators can generate profits
sooner and at higher rates.

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In this cut throat competition, rise in revenue comes with provision of

new services for which cost is incurred. Hence the key to increasing
AMPU comes from optimizing cost.

Way Ahead

Optimizing Cost – A convergent billing system

A convergent billing system with real-time rating and charging

capabilities brings advantages not only to prepaid service billing but
can also be used with post-paid billing. As rating is done in real-time,
invoice generation is faster and requires fewer resources than in
traditional post-paid billing.

Second, real-time balance control saves money for the operator and
makes subscribers happy, as they get balance limitations that really
work. Subscribers can, for example, via Internet get balance
statements that reflect the actual situation and notices that are
activated when reaching a certain threshold.

Third, through convergent billing capabilities the service provider

gets access to new kinds of services. For example, high-value
transactions that require real-time authorisation and rating in order
to minimize risks

All these functionalities help the operator or service provider to

decrease operational costs and to increase margins.

10. FURTHER SCOPE OF WORK

Different geographies using different Cost Allocation methods can be
concentrated and explained in greater detail.

11. REFERENCES
[1] www.researchandmarkets.com
[2] www.the-infoshop.com
[3] www.en.wikipedia.org
[4] www.searchtelecom.techtarget.com
[5] www.3G.co.uk.com
[6] www.ibcn.intec.ugent.be/papers
[7] www.acotech.com
[8] Document on “The Indian Telecom Industry” by Consulting Club,
IIM Calcutta
[9] CA Magazine, Aug 2006
[10] www.frost.com

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The content for one liner:

Page 5: AMPU bags a upper hand as Revenue and Cost, both are
considered together to showcase profitability

Page 6: Revenue factors forming the base for ARPU regard both
recurring and non recurring sources

Page7: All outlays from the point a potential customer is

approached till he churns out form part of the cost bucket.

Page9: Correct cost allocation for every unit of output produced is

a prerequisite to know the actual cost of services offered.

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About Satyam
Satyam Computer Services Ltd. (NYSE: SAY) is a global IT consulting
and services provider, offering a range of expertise aimed at helping
customers re-engineer and re-invent their businesses to compete
successfully in an ever-changing market. More than 51,000* highly-
skilled professionals in Satyam work Onsite, Offsite, Offshore and
Nearshore, to provide customized IT solutions for companies across
several industries.

Satyam's ideas and products have resulted in technology-intensive

transformations that have met the most stringent of international
quality standards. Satyam's Development Centers in India, the USA,
the UK, the UAE, Canada, Hungary, Malaysia, Singapore, China, Japan
and Australia serve 654* global companies, of which 185* are Fortune
Global 500 and Fortune US 500 corporations. Satyam's presence
spans 63* countries, across six continents.

* As of March 31, 2008

www.satyam.com