How telecom operators work and make money
Products, the network value chain, spectrum and towers, the cost structure, and the key metrics.
Industry brief, with a one-minute summary: Telecom: mobile and fixed networksKey takeaways
- A telecom operator builds an expensive network once and then sells access to it every month.
- Mobile operators sell voice, text, and above all data.
- With high fixed costs, lost revenue falls almost straight to lost profit.
Key idea
A telecom operator builds an expensive network once and then sells access to it every month. Revenue is subscribers times average revenue per user (ARPU). Because most costs are fixed, profit depends on filling the network and keeping customers.
Mobile operators sell voice, text, and above all data. Customers are prepaid (they top up in advance, common in India, Africa, and Southeast Asia) or postpaid (they pay a monthly bill, common in Europe, the US, and among Gulf residents). Fixed operators sell home broadband over copper lines (DSL), cable, fiber to the home, or fixed wireless access (FWA, broadband over the mobile network to a box at home). Operators also sell to businesses (connectivity, cloud, and connected devices, often called IoT) and to other operators (wholesale).
- From spectrum to customer
- Key: SpectrumRadio frequencies licensed from the government, often in auctions, for 15 to 20 years or more.
- Radio access networkTowers, antennas, and radio equipment from vendors such as Ericsson, Nokia, Huawei, and Samsung.
- TowersOften sold to tower companies that rent space to several operators.
- Transport and core networkFiber backhaul, data centers, and the core that routes traffic.
- IT and billingCustomer systems, billing, and digital channels.
- Key: Sales and customer careShops, dealers, prepaid top-up agents, apps, and call centres.
Each layer is expensive. Operators increasingly share or sell some layers.
| Line | Approximate share of revenue | Notes |
|---|---|---|
| Network operations, energy, and site rent | About 15 to 25 percent | Mostly fixed; energy costs rose sharply in some markets |
| Staff | About 8 to 15 percent | Lower where operations are outsourced |
| Sales, marketing, dealer commissions, and handset subsidies | About 10 to 20 percent | Higher in postpaid markets with phone subsidies |
| Interconnection and content | About 5 to 15 percent | Fees to other networks and for TV content |
| Spectrum fees and regulatory levies | About 3 to 10 percent | Varies a lot by country |
| EBITDA margin | About 30 to 50 percent | Higher in some emerging markets and at leading operators, and higher where lease accounting counts tower rent below EBITDA (see the trends lesson) |
| Capital spending (capex) | About 12 to 20 percent, more during 5G or fiber builds | Capex intensity; not in EBITDA but uses cash |
So-what
A high EBITDA margin can hide a weak business if capital spending is also high. Look at EBITDA minus capex, often called operating free cash flow.
Spectrum is the scarce input. Low frequencies travel far and pass through walls, so they are good for coverage; high frequencies carry more data over short distances, so they are good for capacity in cities. Governments sell spectrum in auctions, and the price can be very large. Towers are costly to build, so many operators have sold them to tower companies such as American Tower, Indus Towers (India), IHS Towers and Helios Towers (Africa), and TAWAL (Saudi Arabia), then rent space back. Sharing towers and even radio networks cuts costs, and regulators often encourage it.
| Metric | Plain definition |
|---|---|
| Subscribers and net additions | Customers at the end of the period, and new customers minus those who left |
| ARPU | Revenue divided by the average number of subscribers, per month |
| Churn | Share of subscribers who leave each month |
| EBITDA margin | EBITDA divided by revenue |
| Capex intensity | Capital spending divided by revenue |
| Operating free cash flow | EBITDA minus capital spending |
| Data use per user | Gigabytes per user per month; drives network capacity needs |
| Homes passed and take-up rate | For fiber: homes the network can reach, and the share that actually subscribe |
So-what
ARPU in India is far below ARPU in the US or the Gulf, so Indian operators need very large scale and very low costs per user.
Why is churn so costly for a telecom operator?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and terms
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