Eons ago when we were new to telecom, the first time we heard the term "revenue requirements" it struck us as kind of odd and presumptuous. A bit like walking into a job interview and steering the subject right off the bat to "salary requirements."
The term is actually commonplace in a variety of regulated utilities and simply refers to an amount that must be recovered from customers in order to cover costs. As you might guess, such numbers were the subject of imaginative and often mind-numbingly complex cost accounting devices, not to mention regulatory negotiation. And revenue requirements went up, not down.
Of course, "revenue requirements" were about much more than cost accounting. They were a mind set. Combine the notion of revenue requirements with "rate base" and you've pretty much mastered, conceptually at least, the business model of a regulated monopoly. In US telecom, this mind set has persisted waaaaay beyond the official end of the Bell System in 1984.
Along came wireless carriers: structurally separate subsidiaries, largely de-regulated, but whose services remained metered and billed on a minute-by-minute basis. When combined with roaming charges, this price structure led to wildly unpredictable and expensive monthly bills.
In 1998, Dan Hesse blew all that up. Then president of AT&T's Wireless Services subsidiary, he instituted "Digital One Rate", and the flat-rate, minute bucket pricing structure which was rapidly copied by everyone else has governed the US wireless industry ever since. Providing price predictability, eliminating roaming charges, when combined with rapidly declining handset prices, the new pricing plans paved the way for the wireless industry's explosive growth.
Back when the only thing subscribers bought were minutes, carriers began creating pricing loopholes in these minute buckets in order to entice customers their way - "rollover" minutes, "nights and weekend" minutes, "friends and family" minutes, and so on. The good news for carriers: preserving the relative stability of their revenues while "giving away" incremental minutes that often cost nothing (low network traffic at night, for example).
And so a new form of revenue requirements was born. Revenues are mixed and managed across a widening set of service categories, but against a fixed target. The goal is to hold "ARPU", or monthly subscriber revenue, constant by providing an assortment of additional services (texting or SMS, 3G data, family plans, multi-device plans, etc.) which, when averaged out across the subscriber base, yield reasonably stable revenue per subscriber.
The wireless industry kind of stumbled its way into this. Somewhat unexpectedly, declining voice revenues were offset by large and hugely profitable revenues for texting, providing the industry with the breathing room it needed until "real" data (e.g. 3G) services took hold driven by the smart phone wave.
The new revenue requirements model is, essentially, "we don't really care what they buy as long as it adds up to $x, or $y, or $z per month depending on the type of subscriber." And so plans are gradually becoming simpler and fewer, varying by how voice- or data-centric they are, or how "unlimited" they are.
On balance, this is good news for both carriers and (despite grumbling about high prices) subscribers as well. Wireless carriers have largely given up on the distracting pretense that they will be "moving up the value chain." The marketplace wave which includes the Apple AppStore , and Android Market and so on have already taken care of that. By focusing on what they're supposed to be good at – running a communications utility – and getting out of the way of wireless innovation, one can only hope that wireless carriers both improve their service and keep up with the onslaught of mobile data traffic (see somewhat dubious exafloody Cisco forecast).
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