Subscriber Bases: Quantity Or Quality - Page 1 of 3

The average consumer may not be familiar with the phrase average revenue per user, but they definitely buy into the business strategy. Pay-TV was one of the first mediums to embrace the idea of replacing a large quantity of subscribers with a smaller number of quality subscribers willing to spend more money. Now it appears the consumer satellite market is heading down that same path.

Home Box Office, which has become known for creating high-quality drama series like The Sopranos, was among the first companies to try and lure viewers willing to pay more for premium services. Viewers get hooked on the extras and the channel can exist on a comparatively small number of subscribers who pay an extra $12 per month, in addition to their basic cable or satellite-TV bill. Cellular operators also have built subscriber acquisition strategies around higher-cost services such as text messaging, family calling plans and other offerings.

ARPU Strategies

A successful subscriber acquisition strategy is one with a high average revenue per user, or ARPU, analysts say. The reason is simple: A company increases its revenue while holding down costs and maintaining efficiency by having fewer customers. But, companies have to offer higher-rate services to get a higher ARPU and that is not so easy, says Max Engel of Frost & Sullivan. “It becomes a trade-off. You have to invest and do a lot of things to get to those services,” he says.

The best example of increasing costs to get to higher ARPU is in the cell phone sector, says Engel. After companies saturate the market with a basic product or service — like a simple cell phone with basic service — it becomes harder to add subscribers.

Companies experience higher turnover, or churn, of customers when they try to saturate the market with basic products and services. Like cell phone providers, premium cable channels and now DirecTV have discovered, they can reduce churn and build loyalty — and ARPU — with high-end offerings, but as customers pay more for service, they also demand more, he says. “As the ARPU goes up, the implied value goes up and the stickiness of the relationship goes up,” Engel says. So, now in the cell phone market, “companies need to do more than say, ‘You can buy a cell phone from me.’”

That scenario applies directly to the direct-to-home satellite model — DirecTV and EchoStar — and to the satellite broadband model — Hughes Network Services and WildBlue, he says. “The video market has reached that level of saturation and is struggling with many of the same issues as the cell phone companies,” says Engel. “The question of strategy is the great divide and it’s terribly important. Satellite video has crossed that divide and once you get to that world where higher ARPUs is what you’re going after, that means you are trying to keep your customers.”

Although he believes companies have to go after higher ARPU, Engel warns there is a downside: “The real danger with higher ARPU is that you’ll get commoditized and the ARPU will fall through the floor. That’s why cell phones got text messaging and this and that,” he says. “It wasn’t really to raise the ARPU, which takes a very long time. The ARPU model is not just about getting more money; it’s about getting more desirable service with loyal customers.”