ARPU / RGU ratio?

Question about telecoms -- why the obsession with ARPU? (Originally Posted: 03/28/2011)

First off, I'm not in equities or telecoms or anything related to either of them. However:

Something I have wondered for a while now, is why management and analysts alike seem to have such an obsession with ARPU in the telecom industry.

In every industry I have seen up to now, it is some combination of risk-adjusted profits and prospective profit growth which directly determines firm value; not absolute non-cost-adjusted non-risk-adjusted average revenue per user or customer (ARPU). Yet in telecoms there seems to be a different order of priorities, at least according to my limited observations.

Sure, ARPU is a nice number to glance at for quick and not-particularly-meaningful comparison across firms to see how much revenue is being generated by each user. But I have heard conference calls, and seen management presentations with a huge emphasis on this seemingly arbitrary metric. What good is a sky-high ARPU if it costs an arm and a leg in advertising expenses to steal the big-spending customers from competitors? And what good is having those high-ARPU customers if the costs associated with retaining their custom makes them less profitable than lower revenue but less churn-prone lower maintenance users? In some cases it seems as though management is even eager to cripple or eliminate lower-revenue service packages in order to "encourage upgrading" to more expensive service packages. The fact that a large number of those customers may simply switch to a different company due to shitty service incompatible with their needs doesn't seem to be a concern to many of these telecom CEOs and equity analysts, because this is going to "drive ARPU growth".

As a capitalist, this makes no sense to me. Are these management teams' compensation deals linked strongly to ARPU growth? If so, I can understand that these managers are just responding rationally to the incentives they face; but it doesn't explain the analysts' behavior, nor would it explain why shareholders would have approved such an incentive structure in the first place (since it seems likely to directly conflict with management's one true purpose: increasing firm value).

I mean, my guess is Walmart's ARPU is pretty low, much lower than some high end fashion boutique in Soho, but who cares? Profits are what matter to Walmart shareholders and management, not ARPU. It's possible that for year-over-year tracking it could be an interesting footnote in the annual report, perhaps an indicator of possible trends when viewed in the context of the other far more important financial information. But that's about as far as I would expect it to go, not to become a central topic in conference calls.

Yes I know telecoms and retail are different. But I cannot understand why the profit motive would not be common across all industries including telecom. In telecoms there seems to be more focus on this ARPU calculation than on making as much money as possible. And it seems that some managers are basically willing to leave money on the table or flush money down the toilet if it will increase ARPU. And it seems that many telecom analysts don't have a problem with this.

Please help me understand what is really going on here. Thanks.