Sprint Nextel Corporation is earning only $2 average revenue per user (ARPU) from the 400,000 mobile users who bought a Kindle in Q1 2009, according to recent analysis. But huge profit margins mean the mobile virtual network operator (MVNO)-like deal with Amazon is paying off handsomely for the struggling operator.
Despite the industry's traditional focus on mobile ARPU as a key measure of success, the Kindle was a winner for Sprint, Entner said, particularly when he looked at its estimated profit margins.
Since Amazon handles all the billing, support, customer acquisition, marketing, activation and de-activation just like an MVNO, the cost per subscriber for Sprint is minimal.
"They're making, since it's just data, probably $1.70, $1.80 [gross] profit on those $2," Entner said.
By contrast, he estimated that the gross profit for a $56 postpaid subscriber is only around 50% because Sprint spends about $28 per subscriber on a variety of fixed costs.
"Sending you a bill costs somewhere around $2. That's just sending a bill to you every month," he said. "Customer service, it's like $5 to $7 [per support call]. The average customer calls once every other month. Nobody calls [Sprint] for the Kindle."
Sprint's Kindle deal is far and away the most popular partnership of its type, Entner said, but lucrative opportunities where carriers act similarly to MVNOs for specific, service-tied devices are abundant.
"In a way, you are revolutionizing the way a product is being delivered," he said. "The profit margins are through the roof."
Similar revolutions might be possible with more specialized applications, ranging from pacemakers to electric meters, with more popular, consumer-oriented applications including GPS devices that could retrieve traffic updates, for example.
"I think the deal Amazon has with Sprint, far from being unreasonable, is the model of the deals that service providers would like to have with over-the-top players," said Tom Nolle, president of CIMI Corp. "The service-built appliances are really kind of a game changer. They could be, in effect, an MVNO relationship."
There are strong indications that telecoms are aggressively pursuing these partnerships.
In Sprint's discussions of its Clearwire merger vision, it has repeatedly stressed embedding technology in appliances, while AT&T and Jasper Wireless partnered to handle just such MVNO-style partnerships with appliance makers.
"[These deals], if structured right, help the operators to make money off capacity they might not otherwise utilize," Nolle said.
Rethinking mobile ARPU as a metric
Such partnerships can be lucrative "sweeteners," as Nolle said, but these new strategies will require some important changes in the way mobile operators look at ARPU as a measure of success.
"If we take a step back, why are we so obsessed with subscriber additions, ARPU, CPGA, and churn?" Entner asked. "The reason is they are the dinosaur metrics of the wireless industry from the time when the industry was not profitable, so you had to come up with a proxy metric that let you evaluate relative success and failure. One was how many customers you have. I know you are losing billions of dollars, [but] nobody wants to invest in that."
Since then, however, mobile service providers have become massively profitable, and it is time for the industry to fall in line with more traditional metrics of success, according to Entner.
"The industry is profitable, and the carriers are profitable," he said. "So they're partly clinging for historical and sentimental reasons to these metrics. Does Kellogg's tell you how many individuals bought Kellogg's Corn Flakes? No, they tell you sales."
With a new source of untapped, easy revenues, such a compromise is one carriers will probably be more than happy to make.