Customer equity and enterprise value in the mobile industry - Take 2

In our previous post we showed a very strong correlation between the market capitalization of three very different mobile companies and their UK performance. In this post we extend the analysis. Background

The three companies in this analysis are as before:

We looked at adding other companies, but 3 is only a small part of the conglomerate Hutchinson, while T-mobile and Orange are drowning in the bigger telecommunications business of their parents, Deutsche Telekom and France Telecom respectively, and are not listed in London.

Unlike our previous analysis we ignore the requirement to discount future cash flows. For the short (~3 years) customer lives we are looking at here, it doesn’t make much difference.

We continue with the approximation that the average customer life with the company is simply the reciprocal of the churn rate. We did not discuss this assumption before. It is problematic, as churning customers are disproportionally new joiners so the mean and median will be very different. However, we are trying to keep things simple. Churn rates are in the range 14-35%, and company lives from 2 years to over 10 years.

The lifetime customer value we use is then simply (ARPU-SARC)/Churn where SARC is the subscriber acquisition and retention costs. The customer equity is the sum of all customer lifetime values. Results

The main difference with the present analysis is that we include the customer equity from all the key markets of the three mobile operators, instead of just the UK customers as in the previous analysis. The key markets are (in decreasing order of 2005 GBP revenues):

The key markets thus defined account for about 90% of all mobile services revenues for Vodafone and O2, and 100% of revenues for Virgin Mobile.

When we include these key markets, we find the results below based on publicly available information.

Customer Equity and Market Capitalization
Equity (£bn)
Cap (£bn)

A quick graph shows that a linear, and not an exponential, relationship is a good fit (R=99.48%).

[Graph of market cap versus customer equity]
Graph of the market capitalization of three London listed mobile companies versus customer equity calculated in their key markets. Top diagram shows the whole data set while the bottom expands the low numbers to make them easier to see. The parameters on the linear regression fit are 1.07±0.03 and -3.8±1.4 for 6 degrees of freedom.

It is a good fit and a much more expected result. The market capitalization is the customer equity: the slope is nearly one.