The Trojan Horse called ‘What If’ analysis

I have seen a common format of what-if analysis, where the results showcase how the existing ARPUs and AMPUs are “supposed” to change when such-n-such activities are done. Something inside me screams and says ‘Iceberg Ahead!!!” when I come across this!

What the “what-ifs” typically lose out is not one, but a number of “indirect contributors” to ARPU. Here are a few such factors and how they affect ARPU:

  1. The State of the market w.r.t Competitive Presence: When You are the only service provider in the market with a monopoly, You exactly know what your APRU is, and how it would change if You did modify ‘some’ offerings. However, the biggest deterrent to determining success is the presence of Competition and how the same would react to changes You do. The question is how can we quantify the ‘effect’ of Competition and anticipate “everything” Competition can do? A couple of years back, in India, when Aritel was ‘probably’ happy measuring and estimating ARPUs and predicting increases, along came Reliance and followed by DoCoMo, bringing down ARPUs by introducing per-sec billing and rate plans. Here is one of the articles in my own blog, that show the  ‘Price War’ that is going on and its effect. Effectively, prediction works when there are no competitors. Alas, that is never the case.
  2. Type of the Market: How would You measure the capability of a hypergrowing market which shows a potential of ‘A BILLION’ people. GDP and GNP? Which ‘What-If’ analysis toolkit takes into account variations of a country’s GDP and GNP ? Knock, knock!! Who is hiding under a rock?
  3. ‘Increased Subscriber Base’. This is another Trojan Horse. Empirical logic: increased subscribers, is equal to increased usage, equals increased revenues— safely “assuming” costs are constant. First costs are never constant, and they are always on the rise. Now for the ‘trojan’ – when initially services are offered, it is always at a premium price, and so only ‘a handful’ of customers are the ‘Early Adopters’.
  • The first thing that starts to bring prices down is vanishing monopoly with arrival of competition. Therefore, increased competition= reduced prices= introduction of ‘affordable services’; which effectively means with prices going down ARPU decreases.
  • Reduced prices = increase in number of low spending customer bases. Increased low-spending customer base = expansion in subscribers at ‘falling tarrifs’. Hence still reduced APRU.
  • Increased subscribers may be attributed to ‘Increasing penetration rate’ in an area. Increased penetration rate means, increased low usage subscribers, which causes the average usage/traffic per subscriber to decline, effectively which is a fall in ARPU.
  • This for existing subscribers means, declining tariffs as well, and therefore increased usage YET, now effective growth in revenue. Keep in mind, with increased penetration, costs have again gone up.

Effectively, ARPU and AMPU declines. APRU and Penetration rate always have a negative co-relation between them, and what if Analysis typically fails to acknowledge the contributions of the same.

The point is, an operators ARPU is not dependant only on the operator, and hence if the factors are not taken into account, it is always ‘Welcome to a dreamy la la land’ with open eyes.

As if the above three points were not enough, there are still several factors that are ignored in the pro-typical what-if calculations, which include but are not restricted to.

  1. Telecom authority regulations.
  2. Cost factors- especially accounting for sunk-costs and the pervasiveness of joint costs.
  3. Time of entry in the market, and therefore effects of increased licenses on diffusion of available technology and evolution of newer technologies through new innovations.
  4. System and protocol standardizations
  5. Following Moore’s law , rate of evolution of technology.

To add to these is the perceptions in a socially linked world. Effects of customer pains and complains on social media like Facebook. A single unhappy customer may have the capability to make all the known friend-circle to churn out.

If such factors and their effects and contributions are not accounted for and analyzed, all what-if analysis is only as good as the marbles that a kid plays with, thinking they are the world greatest assets. Now fool yourselves? What can I say end of day, its Your own choice.

 

Moinak Banerjee
Moinak works at Protiviti Kuwait, as Product Lead for their Risk Technology Services. Over the years, he has worked in product management for several leading vendors of telecom OSS/BSS software.