Owners should take the time to calculate the value of voice, video and high-speed Internet access contracts.
Most marketing agreements between service providers and multi-dwelling unit (MDU) property owners include ongoing revenue shares of defined income. Though a few marketing agreements provide for commissions or other predefined payments for marketing assistance, revenue sharing is the principal method of compensating owners for marketing support.
Because of the differences among providers, regions, communities and contracts, owners should analyze the value of every proposal from a voice, video or high-speed Internet access provider. Although experienced owners can often guesstimate the value of one offer compared with another, even they are often surprised by the results. An owner should always do the math.
The first and most important question an owner should ask when calculating the income from marketing voice, video and high-speed Internet access services is how revenue is defined. Other metrics are immaterial unless they are applied to quantifiable revenue. Unfortunately, marketing agreements define income in many ways, with an endless array of options and caveats. Only after defining revenue can the owner calculate the amount of applicable revenue per customer, using the definition of income specified in the marketing agreement.
Having calculated the anticipated monthly revenue per customer, the owner must estimate the average penetration for each service to determine the applicable revenue share and the average monthly revenue per unit. Penetration rates are perhaps the most difficult metric to estimate because they vary greatly over time as well as among services, providers and communities.
Not surprisingly, the presence of competition to the marketed services also affects penetration rates. When revenue shares are scaled (i.e. revenue share increases with penetration), competition also reduces the revenue share percentage, often doubling the loss of monthly income. Although competition greatly benefits residents and communities, it almost always takes a sizable bite out of the income that owners derive from marketing agreements.
Today, few flat revenue shares are available. Revenue shares are usually scaled and are based on increasingly complicated formulas. Moreover, many providers use different revenue-share scales for each service marketed. At least one national provider establishes separate revenue-share scales not only by service but also by how the services are bundled. This requires multiple revenue share calculations for each service.
Remember Those Occupancy Rates
Surprisingly, after making all these calculations, many owners forget to allow for occupancy rates. Occupancy’s effect on income can be factored into other measures, such as the penetration rate, or calculated separately, but it must be accounted for somewhere because complete occupancy is seldom realized.
Any income should be discounted for the time value of money. Negotiations with voice, video and high-speed Internet access providers often balance up-front capital (such as per-door fees paid up-front for the use of a building’s wiring) against ongoing income. At least in theory, neither should be preferred as long as future income is discounted at the appropriate rate. Then again, a future buyer saddled with a long-term contract may question a seller that has pocketed all the income up front.
Guided by experience with realistic assumptions, an owner can calculate reliable short-term estimates for monthly income. However, the variance between estimated and actual income increases exponentially with time. Estimates more than a few years in the future should be used primarily to compare the value of competing long-term offers. Owners should update their budget projections regularly.
Henry Pye is Vice President of Resident Technology Solutions for RealPage and can be reached at henry.pye@realpage.com. Terry Fulbright is Vice President, Director of Ancillary Services for UDR and can be reached at tfulbright@udr.com.