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Case-3 Telecom Co. 

Type: Market entry, Investment business case, break even analysis

Problem at hand:

​

Our client provides satellite TV service nationwide. The customer base is being threatened by telcos and cable 
companies offering “triple play,” so our client is considering deploying wireless network (WiMAX) to offer 
broadband internet. Should our client go into the broadband business?

​

Additional Background​

​​

  • ​Our client is a provider of satellite TV services

  • Client facing increased pressure on its customer base from telcos and cable companies offering “triple play” bundles of TV, internet, and phone services

  • Client considering deploying WiMAX wireless networks across the USA 
    to offer its customers broadband internet (and potentially phone service - VoIP)
    - Offering triple play will allow the client to compete with telcos and cable companies

  • Deploying WiMAX is extremely expensive, driven by:
    - Spectrum costs: acquiring frequencies from the federal government
    - Base stations,: tower that send/receive wireless signal (similar to cellular)
    - CPE: customer premise equipment
    - Additional SG&A

  • We need to estimate the no. of subscribers in the USA (based on mgm’t estimates of 5% market share)

  • Broadband internet service price is $20/mo

  • CPE(Customer premise equipment) cost is $150 per household

  • Client estimates 2/3 of costs could be passed through to customer

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* Telecom companies balance the cost per subscriber and required bandwidth per sub by estimating the % of subs who are online at any point in time

How WiMAX Work

wimax diagram1_edited_edited.jpg

Solution:

Framing the problem:

Costs:​

  • Capital expenditures
    - Base stations (towers)
    - Getting the licenses
    - Additional equipment

  • Operational excellence/ongoing costs
    - Maintenance
    - Leases etc.

  • SG&A
    - Additional sales and marketing efforts

Potential Revenues:

  • Market share
    - How big is the market?
    - What is a reasonable market share 
    assumption?

  • Pricing
    - Market price for broadband services?
    - How price sensitive are consumers?

Key issues/challenges:

  • Buy vs. build?

  • Competitive moves?

  • Regulatory issues?

Cost Side

Screenshot (682)_edited_edited_edited.pn

Looking further into cost structure

  • Spectrum ​

Spectrum auction price

Screenshot (676)_edited.jpg

Assume spectrum price average of $500M

  • Base stations

Base station cost = no. of base stations * Cost per base station

Determine no. of base stations:

US population (~300M)/Persons per household (2.5) = 120M (no. of households)

considering 5% market share, 

no. of serviceable households = 5%*120M = 6M

  • Base station bandwidth (80,000 kbps)

  • Bandwidth per household (320 kbps)

  • % of concurrent connections* (50%)

Therefore, no. of ​Households per base station = 80,000/(320*50%) = 500.

 

In other words 80,000 kbps is completely used up at any point of time by the subs who are online (which is 50% of the total no. of subscribers).

* Telecom companies balance the cost per subscriber and required bandwidth per sub by estimating the % of subs who are online at any point in time.  

Thus,

      no. of base stations = no. of serviceable households( 6M )/no. of ​Households per base station( 500 )

=12000

Determine cost per base station

Qualitative:

table2.jpg

Quantitative:

Build

Lease

table3.jpg

Leasing will require lower initial investment and allow faster time to market

Thus,

Total base station cost = no. of base stations * Cost per base station

= 12000*($150K)

= $1.8 Billion 

  • Customer premise equipment

Additional Information upon asking( although this data was provided earlier in the case study in actual scenario we need to ask for this data specifically from the client. 

  • CPE cost is $150 per household

  • Client estimates 2/3 of costs could be passed through to customer

Thus, ​

the net CPE cost to client will be = 1/3*150*6M = 300M

table4_edited.png

$500M

$1,800M

$300M

Assumed minimal

Total cost: $2.6 Billion

Revenues

​The potential revenue lines are:​

  • Broadband internet only​

  • Internet and voice (phone)

  • Triple play (defending core)

- To be conservative, assume internet only​

- price is $20 per month

= 6M subscribers x $20/mo x 12mo = $1,440M 

​

Total Revenue: $1.44 Billion

Recommended Solution

Key Findings:

​

  • Deploying a WiMAX network solution across the USA is extremely expensive; even with leasing base stations, the network cost amounts to $2.6B  

  • Revenue uplift from broadband service would total $1.44B and would not enable the client to break even in year 1 

  • Additional costs may be incurred

  • Some risks concerning timing of deploying and market pricing need to be addressed

Recommendation:

1. Offer DVR to compete with cables’ VOD 

2. Increase number of local and national HD channels

  • Investment in a WiMAX solution probably does not make sense due to high up-front costs and lower revenue uplift

  • The client should focus on defending the core business of satellite TV; client should consider the following:

​

- Segment customers and increase share with most profitable segments

- Grow scale to reduce cost per subscriber

- Go into content: look for acquisition/ partnership to drive differentiated content

- Technology innovation:​

​

​

​

- Partner for broadband. E.g., partner with telcos where they are not building video infrastructure

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