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

* 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

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

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:

Quantitative:

Build

Lease

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

$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