Best of the ISP-Lists

The Check Has Been Cashed

Members of the ISP-Investor list discuss one of the details that any ISP purchaser needs to consider: how much service has been paid for, and how does the business account for prepaid subscriptions?

[February 27, 2001]

On the ISP-Investor list in January, VL asked,

"When valuing an ISP for sale, do you deduct value if subs are prepaid?"

Some respondents suggested that there's no reason to deduct for prepaid subscribers:

[TN offered] "Aren't prepaid subs the ones that will likely stay with the company? Isn't it the monthly ones that you need to worry about jumping ship? I don't understand the logic of selling an ISP at a discount because it has prepaids, as long as it has a proven history of generating revenue each month. Prepaids are the customers that stick around through all adversity: monthly subscribers are gone at the first sign of change."

[DI noted] "I would hope that ISPs with any amount of prepaid accounts is recognizing revenue for those accounts on a monthly basis, and not all at once (offsetting the marginal cost of providing service to that account). Of course, the current paid-in amount should be tallied in a liability account. Discounting based on prepaid services really sounds like a buyer's trick: it artificially depresses earnings."

Others argued that prepaid customers are a liability:

[ADS observed] "If you actually do what's right and put the prepaid amount in a bank account and deduct the monthly billing amount every month, then the customer will be worth quite a bit of money. If you have spent the money and there is an outstanding liability to provide service, then there should be a subtraction.

It has also been my experience that a large number of prepaid annual customers do not renew. They tend to renew quite a bit more often if you switch them over to monthly billing."

[RY added] "When you take on a prepaid account, you have absolutely no guarantee that the customer will renew. If one cancels early, you could then be responsible for refunding the unused portion of his subscription. This is no buyer's trick.

Suppose that you bought an ISP and all of their customers were annual and had just renewed last month. You would have to service them all for eleven months without any income. How do you get compensated for that?"

VL returned to offer his own perspective on the question:

"Prepaid subs are not generating revenue every month: that's what prepaid means. If a customer paid you $200 six months ago for a year's worth of service and you sell today, the buyer still owes the customer another six months of service, except you already received and spent the money."

TN disagreed:

"An ISP that sells 50 prepaid annuals per month at $200 is the same as an ISP that sells 500 monthly subscriptions at $20. And I personally think it is a lot easier selling 50 subscriptions than 500. Most prepaids switch from monthly because they like your company and have developed loyalty: these are the customers any company wants."

—End