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


6 October 2005

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.


The three companies in this analysis are as before:

  • Vodafone (VOD.L), while UK headquartered has a very strong international presence with Germany as its biggest market (about 30% of revenues). With a market capitalization of almost £100bn it is by far the largest of the three. In 2004, it had revenues of about £34bn and losses of £9bn.

  • O2 (OOM.L) has international operations, but the UK is the largest market. It is capitalized at about £14bn, and it a profit of £0.2bn on revenues of £5.7bn in 2004.

  • Virgin Mobile (VMOB.L) is a UK based MNVO that focuses in pre-paid customers. With a market capitalization of just over £0.7bn it is the smallest of the three. It had profits of £89m on £0.49bn revenues in 2004.

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):

  • Vodafone: Japan, Italy, Germany, United Kingdom, Spain

  • O2: United Kingdom, Germany

  • Virgin Mobile: United Kingdom

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
Year Company Customer
Equity (£bn)
Cap (£bn)
2005 VOD.L 90.76 90.24
2004 VOD.L 82.39 87.83
2005 OOM.L 15.72 10.62
2004 OOM.L 13.95 8.88
2003 OOM.L 10.12 3.98
2002 OOM.L 6.27 5.92
2005 VMOB.L 2.33 0.56
2004 VMOB.L 2.82 0.47

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.