Telecom Industry Primer

Summary Slides
Introduction
• Emerging in the 19th century, the telegraph allowed for nearly instant communication by transmitting pulses of
Telegraph electricity between two points over copper wires. By translating these pulses into letters using Morse Code,
messages called telegrams could be sent across a great distance
• By the end of the 19th century, the telegraph was replaced by the telephone
• This allowed for sound waves produced by people’s voices to be converted into variations of electrical current,
Telephone which then traveled across wires to another telephone, where they would be converted back into sound waves
• This opened up “instant communication” to all of society

• Next came radio waves in the early 20th century

Radio • Radio waves allowed information to be broadcast out to many endpoints simultaneously
• Thousands of people spread across the country could now receive the same information at the same time

• Towards the end of the 20th century, cellular networks were developed, which used radio waves for 2-way voice
Cell Phones communication to and from wireless phones
• Since its first implementation, cellular technology has rapidly advanced through a sequence of “generations,” each
one faster and allowing more data transmission

1G • Only allowed voice calls

2G • Added the ability the transmit small amounts of data, introducing “text messaging”
• Increased data transmission speed up to 2 Mbps
3G • Enabled first “smartphones” with full internet capabilities
• Increased the data speed another 10x, with speeds up to 20 Mbps
4G • Enabled streaming HD video content, including live video chats

5G • Just beginning–will exponentially increase amount & speed of data

How Telecom Works

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1. When you speak into your cell phone, its microphone picks up your voice and then converts it into a digital signal–your sound waves become 0s and
1s. The phone’s antenna converts that signal into radio waves, broadcasting it out in all directions
2. These waves are picked up by a receiving antenna on a nearby cell tower
3. Radio hardware at the cell tower converts these waves back to a digital signal, sends it to a switch connected to the broader wired network, which
then determines where the signal should go next
4. After traveling across the wired network, the signal hits another switch at the destination, gets sent to a cell tower near your grandmother, and
rebroadcast again as radio waves
5. The recipient’s cell phone picks up those waves with its own antenna, and then decodes the digital signal, converting it back into the sound waves of
your voice to come out through the speaker
Telecom Ecosystem
Telecom Ecosystem
Network Operators (or Service Providers)
• This is who you have your contract with for
your TV, internet, and phone services.

• Examples: Verizon, AT&T, Vodafone, Deutsche

Telekom, and Softbank.

• Over the past century, these companies have

installed massive networks of wires and cables
across the globe. These networks started as
copper phone lines, then expanded to include
coaxial cable (for TV & later internet), and
most recently, high-speed fiber optic cables.

Network Infrastructure
• The conversion of signals to and from wireless radio waves requires switches, routers, and
other radio hardware. Example manufacturers: Huawei, Ericsson, and Qualcomm

• Radio hardware is housed in cell towers. These are frequently owned by separate tower
companies and leased out to multiple tenants (including not just wireless telecom but also
radio, television, and governmental agencies)

• Example of companies: American Tower & Crown Castle in the United States
Telecom Ecosystem
Regulators / Licensing bodies Device Manufacturers
• Wireless telecom transmissions only function across specific frequencies of the electromagnetic spectrum, • The major phone manufacturers are well-known
which government agencies (FCC, Ofcom) carefully regulate globally: Apple, Samsung, Huawei, just to name
a few
• The spectrum gets divided into bands. The government creates licenses to operate at specific frequency
bands, and then auctions them off to telecom companies

• These licenses are finite, and only come up for auction when there is a transition to a new generation of Content Providers
technology, requiring new frequencies and costing billions of dollars • Historically, this meant TV, transmitted
wirelessly via radio waves or wired via a cable
• Regulators also support competition in the marketplace and ensure consumer protection, for example, setting network
price ceilings and floors around telecom services
• Today, content is accessed largely over the
internet through content providers’ platforms or
apps (known as “over-the-top” or OTT services)

• OTT examples: video streaming services (Netflix,

Hulu, Disney+); messaging & communication
services (such as WhatsApp and Skype)

• OTT is a major disrupter for telecom companies,

representing their own advances working
against them
Telecom Services
Telecom Services
Consumer Wireline
• Wireline connections deliver Voice, Television, and Internet services
directly into residences

• In developed markets, fixed voice and fixed TV services have been

significantly declining as voice has moved to mobile phones and OTT video
services have replaced TV subscriptions; fixed internet has become the
dominant consumer wireline service

• Different network operators deliver these wireline services into consumers

homes over different types of lines, based on their historical
infrastructure:
− Phone companies offer Digital Subscriber Line (DSL) internet
connections over phone lines; these networks have high coverage but
lower speeds
− Cable internet is the most common connection, leveraging the
infrastructure initially built for cable TV
− Fiber internet uses fiber optic cable all the way to the user’s home,
offering exceptionally high-speed connections; fiber is slowly replacing
cable as networks get upgraded

• Consumer Wireline is a smaller share of telecom services in emerging

markets. Due to the high “last-mile” infrastructure requirements, these
markets frequently leapfrog straight to wireless for all consumer services
Telecom Services
Consumer Wireless
• Wireless services include both voice and internet delivered directly to mobile
devices

• Historically, network operators charged based on usage: voice minutes and

gigabytes of internet data used each month. Recently, wireless plans have
started shifting to “unlimited” offerings, with no voice or data limits

• Network operators have begun offering “bundled” plans, which include voice
& data combined with other features and services, and even third-party OTT
services in some cases

• Modern wireless plans also frequently include the mobile device itself as part
of the offering, paid for in installments across the life of the contract

• The growth dynamics of consumer wireless look different across markets:

− In developed markets, where smartphone penetration is high, growth is

focused on increasing revenue per user through more expensive unlimited
data plans and device bundles

− In emerging markets, smartphone penetration is significantly lower, so

growth instead comes from growing the volume of customers, slowly
shifting them to higher value plans over time
Telecom Services

Business

• Business telecom services are fundamentally similar to those

on the consumer side—voice & data services are provided
over either wireline access (to business buildings) or through
mobile plans (for business employees)

• Some additional value-added services are also offered to

businesses, including cybersecurity, network backups, cloud
services, local network solutions, and voice over IP

• Despite having large accounts with longer life cycles, the

business segment is a much smaller share of total revenue for
network operators compared to the consumer segment; the
total volume of business customers pales in comparison to the
total consumer population
Consumer Wireless – Economics
Consumer Wireless – Economics
Consumer Wireless is highly profitable; a large network operator can have EBITDA margins over 40%
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High Barriers to Entry High Contribution Margins “Sticky” Customers
• Setting up a telecom network requires • Once the wireless network is built, • Customers are unlikely to switch
massive capital investment—hundreds transmitting service to an additional between network operators after they
of billions of dollars to lay cable lines, set phone has minimal marginal cost for the have signed up for their plan
up cell towers, buy radio hardware, and network operator
secure licenses • Network operators measure this through
• Network operators closely track Average their churn rate, which is the percentage
• Verizon, for example, lists $300B+ in Revenue Per User, also known as ARPU. of customers who are lost in a given
Property, Plant & Equipment on their ARPU is driven by: period. Typical churn rates for major
Balance Sheet, which largely represents − Product mix: The mix of different network operators are ~1%
the investment in their network wireless plans across customers
infrastructure (unlimited plans, service bundles & • While churn is relatively low, each
device plans all increase ARPU) percentage point can represent
• This accumulated investment makes it − Customer mix: Whether customers are significant cash lost given the industry’s
very costly for new players to enter a prepaid or postpaid (prepaid typically high contribution margins
market, keeping competition to just a have lower ARPU, are more likely to
handful of players in each market switch, and are more common in • Strategies to reduce churn: multiyear
emerging markets) contracts, device payment plans, and OTT
bundles
Consumer Wireless - Competition
 Consumer Wireless - Competition
Incumbent Network Operators
• Telecom markets around the globe have
followed a typical competitive evolution:
1. Starts with competition for geographical
coverage
New Entrants 2. Competition shifts to network and service OTT Content Providers
New entrants face 2 major barriers: quality • In the US, TV subscriptions are declining as
1. Massive up-front infrastructure investment 3. Once all have high coverage and quality, demand for OTT streaming explodes
required compete through additional services and
2. Developing a brand that can steal share in a features, introducing bundles and device • Network operators’ responses:
low-churn industry plans − Acquired media companies with OTT
4. When new tech such as 5G emerges, offerings (AT&T acquired HBO)
• Mobile Virtual Network Operators (MVNOs) competition shifts back to race for − Partnerships instead of acquisition (Verizon
bypass #1 by leasing excess network capacity network-wide upgrades partnered with Disney+)
from existing operators − Creating own platforms (Comcast created
• Throughout this life cycle, competing on price Xfinity Stream)
• MVNOs target specific customer segments, is the least preferred strategy; price cuts can
creating a brand and product tailored to their steal share in the short run but have a massive
needs impact on the bottom line

• Even when price competition happens, the low

churn in the industry makes changes in market
share very slow, taking many years to play out
Glossary

• Average Revenue Per User (ARPU) – Key metric tracking the average revenue generated per user
• Churn – Key metric measuring the percentage of customers lost in a given period
• Mobile Virtual Network Operators (MVNOs) – Companies that offer wireless services to customers but don’t own or
operate their own networks

• Network operators – The company that provides TV, internet, and phone services to customers
• Over-the-Top (OTT) – Services where content is accessed over the internet through content providers’ platforms or apps
• Value-added services – Additional services offered to businesses, such as cybersecurity, network backups, cloud services,
local network solutions, and voice over IP