Metrics matter. Nextel Communications lost 28% of its stock value in one day last March after it failed to meet Wall Street expectations for quarterly net subscriber additions and, thus, operating cash flow. Three weeks later, the repercussions of the announcement still were present — Nextel's stock had fallen an additional 14% from the pre-announcement price, even though it expected more than 500,000 net subscriber additions and cost-cutting plans were in place.

Four months later, another example reinforced the importance of subscriber metrics: Dennis Strigl, Verizon Wireless president & CEO, announced his company's subscriber metrics nearly three weeks before releasing more traditional financial numbers.

“This was a strong quarter in terms of gross and net additions as we continue to focus on the fundamentals of this business and the quality of our customer base,” Strigl said in a July 5 release.

The preceding examples highlight the fact that quarterly metrics — net additions, ARPU, cost per gross addition (CPGA) and churn — are key operating benchmarks used by Wall Street and others to evaluate a carrier's performance. These metrics are relied upon to measure a company's success in using infrastructure build-outs, aggressive sales and marketing organizations to generate subscriber revenues and much-needed operating cash flow. This focus on short-term growth instead of long-term financial stability likely will continue because of the industry's dependence upon current revenues to build networks that will generate future revenues. Yet reliance on these metrics is risky because each carrier computes metrics differently.

Vague Definitions

Despite the importance placed on quarterly subscriber metrics in annual reports, analyst calls and press releases, assessing the formulas by which their values are generated is difficult. True, vague explanations exist that help give metric trackers a limited understanding of the environment measured, but the exact composition of key subscriber metrics remains proprietary to the carriers and to the non-carrier organizations that model the metrics using separate definitions.

Finding broad definitions for subscriber metrics is no easier than discerning the carrier formulas for the metrics. None of the Web sites, quarterly financial releases or investor bulletins of the five largest carriers provides definitions for net subscribers, ARPU, CPGA or churn. Organizations such as CTIA either lack definitions to clarify the metrics or offer only generic definitions. CTIA defined churn as “a measure of the number of subscribers who leave or switch to another carrier's service.” Even the FCC with its Wireless Telecommunications Bureau does not define any of the four major subscriber metrics in its glossary, despite using them in its own wireless-industry reports.

Immediately noticeable is the lack of detail in the general subscriber metric definitions. (See Figure 1 on page 16.) Even the most common and important term of all — subscriber — is not clear. For example, if a family of two signs up three phones, is sent two bills but has one billing address, how many subscribers are added to net subscribers? Is ARPU measured by the number of phones (units) or users? Is an adjustment made to CPGA to reflect that three phones were sold to two people at one address and therefore some administrative costs may have been reduced? If one person in the household moves his phone to the other person's bill but continues to use the phone, has churn occurred?

Metric	Definition
Net Additions	The number of subscribers who sign up for a carrier's service
ARPU	The average revenue generated per subscriber or phone
CPGA	The cost to a carrier of adding a subscriber
Churn	The percentage of subscribers who leave a carrier's service
Figure 1. General wireless subscriber metric definitions

The questions may appear trivial, but when the example above is multiplied by 50,000, or when a corporation builds a campus network and asks for individual bills and phones for each cost center, lack of precise metric definitions begins to increase a company's risk potential.

Loss of Market Confidence

Carriers face risks when reporting subscriber metrics; none has a greater impact than the loss of market confidence. The market views quarterly subscriber metrics as a powerful statement of a carrier's growth accomplishments and earnings potential.

“Wireless metrics are perceived as important to the investing public as the financial statements themselves,” said Mike Hanson, Nextel Internal Audit Operations Group manager. “As little as a dollar in ARPU or a quarter of a percentage point in churn can impact the perceived value (market cap) of a wireless company by a couple billion dollars.”

Susan Koeppen, Microsoft corporate attorney, concurs.

“As a current service provider with wireless companies, we rely upon subscriber metrics to value the relationships with our wireless partners,” Koeppen said.

Some national carriers do not fully disclose their subscriber metrics though they track the numbers internally. SBC and BellSouth own Cingular, but neither includes 1Q or 2Q CPGA or churn metrics for Cingular in its quarterly reports or statements. SBC declined to include Cingular's ARPU in its quarterly press releases or earnings summaries.

Other carriers such as Nextel refrain from releasing exact numbers and instead use approximations. For instance, Nextel announced its 2Q churn as approximately 2%, which was subsequently interpreted in the trade press as 2.3%. In fact, the key subscriber metrics are prone to variations based on a carrier's choice of included variables and methods of calculation.

Net Additions

The net additions metric measures the increase in new revenue-generating subscribers that a carrier has added over a given time, usually a fiscal quarter. (See Figures 2 and 3 on page 18.) It is the result of the number of quarterly gross additions minus permanent deactivations. National carriers have between 500,000 and 1,000,000 net additions per quarter. The term “addition” is used synonymously with customer, subscriber and handset, although all could refer to non-revenue-generating accounts and do not clarify a situation where an individual owns multiple phones.

Net additions may vary substantially even after a formal earnings release. Less than a month after an April 5 announcement of its subscriber metrics, Verizon Wireless removed nearly 900,000 non-revenue-generating accounts. This “billing-system reconciliation” removed approximately 282,000 or 35% of its 1Q net additions from the initially released number. When some carriers add the net additions to their total customer base, they also include resale and affiliate additions, which in Sprint's case is more than 25% of its total net additions. Some carriers even highlight their total number of global subscribers instead of domestic net additions: Nextel emphasized its 658,000 new global additions before its 485,900 new domestic additions in its 2Q earnings press release.

	Verizon	Cingular	AT&T	Sprint PCS	Nextel
1Q	27,122	20,535	15,748	11,776	7,131
2Q	27,930	21,218	16,416	12,823	7,684
Figure 2. Total subscribers for major carriers, 1Q and 2Q 2001

Unclear is how the net additions are counted. Is an addition only a digital subscriber, or does it include any added subscribers? This distinction is not reported uniformly but is important because digital subscribers generate the majority of the billable minutes, especially during peak usage hours. Similarly, net-addition numbers do not clarify how long a former or current customer must remain non-revenue generating to be declared a deactivation. If a company included only deactivations that were 90 or more days as opposed to something less, it could manipulate its net additions. This practice might be important if an upcoming metrics release were key to securing financing or resurrecting a sliding stock price, or if management needed to show Wall Street a more stable growth pattern.

ARPU

ARPU, a measure of operating performance, is declining as competition among the national carriers intensifies. The average reported revenue produced by an average unit for wireless carriers is between $40 and $70.

	Verizon		Cingular		AT&T		Sprint PCS		Nextel
	Q1	Q2	Q1	Q2	Q1	Q2	Q1	Q2	Q1	Q2
Net Adds (Thousands)	518	808	854	701	585	6681	812	843	520	486
ARPU	$46	$49	$50	$52	$62	$64	$60	$61	$71	$72
CPGA	$205	$204			$327	$332	$360	$340	$475	$430
Churn	2.8%	2.3%			3.0%	2.9%	2.5%	2.2%	2.5%	2.3%
Figure 3. Subscriber metrics for major carriers, 1Q and 2Q 2001 1 If include partners and affiliates, then the number is 860,000

Variations in computation can affect both the value and meaning of ARPU. It is dependent on at least three variables: time, subscriber units and revenue. Time refers to the period in which ARPU is measured and is most often given as a quarter. Subscriber units are measured as individual subscriber accounts or handsets. Revenue is the money generated by the unit during the given time period.

Simply dividing service revenue by the total number of subscribers does not give an accurate ARPU measure. Carriers can choose what time definitions suit their purposes. They can define “average” as being an average revenue generated per customer for the last three months, as the average of monthly ARPU averages, or weigh beginning or ending units differently for each quarter or month and arrive at a number that more accurately reflects a company's sales cycles.

Subscriber units usually account for only those subscribers with wireless service, and, increasingly, ARPU is calculated using only revenue-generating contract subscribers paying for digital service. Data or other non-cellular services often are excluded, as with Cingular, which excludes Cingular Interactive from its ARPU calculations. National carriers tend to emphasize domestic ARPU because international subscribers have a much lower ARPU and, if included, would drag down the metric. For example, WR Hambrecht + Company reported Nextel 1Q ARPU as $52, or 27% below domestic ARPU.

Finally, the revenue used to calculate ARPU varies across carriers, even though carriers state explicitly that they use service revenue for ARPU calculations. Equipment and accessory revenue can drive down the cost of ARPU and often depends on inventory and procurement procedures. Roaming and long-distance revenue generated by other carriers' subscribers from reciprocal compensation agreements and other sources often is disputed and, if included in service revenue, can cause a restatement in revenue and a change in ARPU. Access and usage fees also may affect total revenue and ARPU. For instance, Sprint began reporting contract-cancellation fees on a net basis in 2Q01, thereby reducing ARPU by $2 per quarter and making comparisons with previous ARPU numbers more difficult.

CPGA

CPGA is the cost of attracting and activating a new subscriber and typically ranges from $300 to the mid-$400s. CPGA normally includes select marketing and sales expenses, equipment subsidies and any procurement costs.

As CPGA provides some insight into a company's overall sales, marketing and procurement function, carriers increasingly are hesitant to release complete and detailed information that could be used to rate them against their competitors. Verizon Wireless did not release its 1Q or 2Q CPGA. Yet when Verizon did offer the 1Q CPGA number of $204 at an investors conference, it did not include variables and marketing costs other carriers regularly include, according to Wit SoundView's May 23 Wireless Survey, which estimated Verizon's CPGA as closer to $320.

Churn

Churn is the number of subscribers permanently disconnecting their services over a given time as a percent of a carrier's total subscriber base. Churn usually is measured on a monthly basis and ranges from 2% to 3%. For example, Verizon's 1Q churn for contract customers was 2.3%, and prepaid was 2.8%.

Churn is a significant expense for carriers as they routinely offer substantial equipment subsidies to make their products competitive. Churn is thus a key metric because it offers a barometer of customer satisfaction and industry competition.

Reported churn numbers generally assume each customer who leaves a carrier is unique and that customers do not leave a carrier more than once. Yet with current promotional offers, this happens frequently. Carriers attempt to account for this by adjusting their churn numbers to eliminate deactivated units that were activated and then deactivated within a set period or within a geographic area. This number is commonly known as false or phantom churn. Its calculation and value are considered confidential because different assumptions can move churn up or down a few tenths of a percent.

Enhancing Metric Integrity

Carriers can ensure that they are protected from a loss of market confidence when reporting subscriber metrics by adhering to a few simple practices that would enhance metric integrity. First, carriers could agree on standardized and public definitions for the key subscriber metrics. Even if the metrics were reported within an approximate range to protect the carriers' more sensitive operational numbers, the practice would strengthen the value of current subscriber metrics and allow them to serve as more trusted indicators of a company's performance.

Next, carriers should ensure that calculated metric values are generated from a single source and monitored by accountable owners. This single source, whether automated or manual, should calculate subscriber metrics via strict definitions and detailed computational steps defined within a formal data dictionary. Once it is publicly reported, carriers should monitor the public information actively to ensure that internal metric values are equivalent to those obtained by the public and analysts. Any variations between internal and external sources should be corrected immediately to reduce the public's confusion.

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Forbes (sforbes@gwu.edu) is a Nextel Communications senior technology auditor.

Image Polish

Why do carriers continue with differences in metrics, and how do they benefit from such disparity? A few possible answers:

• “The differences in reporting can be used to polish their (carriers') image.”
  — Todd Rethemeier, Bear Stearns senior wireless analyst

• “The bottom line is because the metrics are not audited, most carriers will look to highlight the metrics that make them look most favorable.”
  — Craig Mallitz, Legg Mason associate analyst, wireless services

• “Lets face it, there is a fair amount of gaming with what people report. Because there are no standards, you can get a company that decides not to report churn. For example, Leap doesn't tell you what their churn is until after the market has been established for over a year. (By gaming) it's not so much making themselves look better as much as it is omitting things. Like on the Leap example. I think they don't want to discuss early churn because they probably have high early churn.”
  — Mike Felicissimo, Qwest Wireless vice president finance - treasurer