Telecom Network Valuations – How to Value a Modern Telecom Company

Exploring the four simple concepts that drive Telecom Network Valuations

By: Tom Coffey, Senior Director, Valuations Systems. With contributions from Alfonso Porras, Associate Vice President, Valuation Solutions.

This article lays out the concepts and aspects that make up telecom network valuations for modern telecommunications companies. Put simply, a modern telecom company requires a large capital investment to build a network that can serve internet access and/or television service to individuals and businesses in a known geographic region. 

There are limits to the ‘upside’ – only a certain level of revenue and return can be generated. Expansion requires more capital. Telecommunication companies are unlike software companies, which can grow quickly 10x or even 1,000x over a short period of time. However, telecommunications companies are a steady cash-producing business. They also provide an essential service (digital access) in the modern world. 

So, valuing telecommunications companies is fairly straightforward. Risk and uncertainty exist, but the key determinants of value for telecom companies can be measured within reasonable ranges.  

For the purposes of this article, when we refer to the Telecom Network we are talking about the entire business and enterprise value. We’ll focus only on ‘wireline’ type telecommunications companies, though the structure is similar for ‘wireless’ companies. This is an article about concepts and not numbers. There are many sources of data for quantification of the aspects identified here. 

Four Key Concepts of Telecom Network Valuations

For our purposes, we will consider four key areas that drive Telecom Network Valuations: 

  1. Capital Costs: What investment does it require to build and maintain a broadband network of machinery and equipment? 
  1. Revenues: What is the maximum customer potential and how much can you earn each month? 
  1. Operation Costs: How much does it cost to keep the business going? 
  1. Risks: What kinds of risks should be considered? 

1. Capital Costs

The investment, or capital costs, represent the tangible assets needed to run a telecom network. These include the fiber cabling, headend & hub equipment, and even customer modems. Telecom networks are costly to build. Physically, the network will last a long time if well maintained.  

Greenfield: When you are starting with no existing network and building it from scratch. An accurate estimate of cost can be done using the Replacement Cost New (ReplCN) approach. It will take years to recoup the investment (your payback period) and determining the financing can be just as impactful as the cost itself. 

Upgrade or Expand: When you are operating a network that is obsolete because of old technology and equipment like copper cabling. Or you may be expanding your network to additional neighborhoods and streets. Upgrading older networks requires a strategy and consideration of the future customers and demand. In a hybrid network (fiber and coax) it’s possible to slowly add capacity by extending fiber closer to customers and by adding equipment like amplifiers.  

However, legacy copper networks will have to be fully replaced with fiber to meet current and future customer demand. What kind of download and upload speeds will customers demand now, and in 5-10 years?  

Maintenance: All telecom networks require a degree of maintenance replacing and maintaining the network as it physically decays. Even today’s current modern equipment will become technologically obsolete in time.  

Property Tax and Other Capital Costs: Property tax is not an investment in capital but rather an annual tax on the capital deployed. In addition to property tax, there are permitting costs, regulatory costs, and even pole attachment costs that can significantly impact the initial deployed capital.  

2. Revenue & Customers

Revenue comes primarily from providing telecommunications services to individuals and businesses, such as internet access, telephone service, and television service. Revenues are a function of: 

Revenue = Market Size (Locations Passed) x Penetration Rate x Average Revenue Per User (ARPU) 

Market Size

A Telecom Network reaches a fixed number of locations that could purchase telecom services. Broadly, these are residential and business locations where a broadband connection is or can be installed, referred to as Broadband Serviceable locations (BSLs).  

CostQuest develops a location dataset of residential and business locations, called the Broadband Fabric (Fabric), which allows users to assess the number of potential customer locations and units in an area and determine the market size. The total market size is based on all BSLs or potential customers. 

However, revenues will be limited by the total number of potential customers or the BSLs to which the network is built or passed.  

It’s important to note that a single BSL could be a multi-dwelling unit building with multiple units and potential customers. Each BSL is labeled with the total number of units within the structure. The total number of units represents the total number of potential customers, and therefore determines the potential market size. 

Example of a BSL that is a Multi-Dwelling Unit containing a total of 109 units: 

Example of Onlooks data points on a map - showcasing 109 units in a Multi-Dwelling Unit
*The green points represent CostQuest’s Fabric location data provided to the FCC, states, and other federal agencies to use in their programs, including the FCC’s public National Broadband Map and NTIA’s BEAD program. The Fabric data supports the identification of the exact geographic placement of each location and what service levels are available to all BSLs across the US. 

Penetration Rate

No Telecom Network will capture every customer it passes as a paying subscriber; however, the goal is to acquire as many location passings as customers.  

The penetration rate represents the percentage of the customers that are captured compared to the total potential customers. There are several factors generally to consider here: 

  • For new Telcom Networks, how quickly can you add customers to increase your penetration to a steady state? What is the competitive landscape of the selected market? How much does it cost to acquire a customer?  These costs include the marketing, administration, and installing physical equipment. 
  • For existing Telecom Networks, what’s the barrier to entry for new providers? What is your churn rate? The rate at which customers cancel service and can be translated into an average customer length. 
  • What is the ‘terminal penetration rate’ or the steady state of a customer base. In the mature business what percentage of the BSL’s are you capturing? 

Average Revenue Per User (ARPU)

The ARPU is usually expressed as a monthly price a customer pays for the service. There are typically several types of customers, such as business and residential customers, who will purchase different services at different prices. There is downward pressure on ARPU as fixed wireless and fiber providers intensify competition and customers purchase fewer services from telecom providers and more from streaming services.  

Real-life Example: Calculating the potential revenue of an area

In the selected geographical area shown in the screenshot below (representing 286 Hex 9 Cell areas), there are a total of 3402 units.  

If you were to capture a 40% penetration rate and charge $50 per unit per month: 

Monthly Revenue = 3,402 units x 0.40 x $50 = $ 68,040 per month 

An example Onlook's unit data, showing 3402 total units in the area - 2108 being residential and 485 being non-residential.
*An example of the data and capabilities in CostQuest’s OnLook GIS Analytics app to support opportunity analysis and telecom network valuations. 

3. Operation Costs

What does it cost to operate the network? This depends on the size and type of Telecom Network but will often include: 

  • Operating or Service Delivery Expenses: Telecommunications are complex systems that require teams of engineers and technicians to operate. Additionally, there are costs for utilities like power, non-capital maintenance, hookups, support, and many other day to day activities.  
  • Programming and Production: Telecom networks will pay content provider and other programming expenses. Large Telecom Providers will create their own production. Telecom Networks are also subject to regulatory fees such as franchise fees. 
  • Marketing, Sales, and Promotions: Some of these costs were discussed in the prior section and represent the continued efforts to obtain and retain customers. 
  • Administrative: Costs incurred by all types of businesses such as billing, accounting, legal, etc. 
  • Interest and Tax Expense: These expenses are common in Telecom Networks but may not always be applicable for certain types of entities and valuations. 

4. Risk and Uncertainty

Telecommunications networks tend to be a stable business model, but there are several areas of uncertainty: 

Building: Building a greenfield telecommunications network is complicated, and there are significant execution risks for parties that are not experienced. These can range from engineering and technical to regulatory and permitting. The risk here is a higher cost and a longer time to build. 

Below is an example of a mountainous area with a greater than average greenfield network build complexity. The network complexity scoring helps assess the potential complexity of a fiber build for all locations within the selected hex cells. The value blends linear density, terrain, cost differentials, large area density, distance to a central core, etc. 

An example of the Greenfield Network Complexity data and capabilities in the OnLook GIS Analytics app
*An example of the data and capabilities in CostQuest’s OnLook GIS Analytics app.

Financing: Many companies will need to finance building the network using debt due to the high capital cost of a network. Changes to interest rates or changes in the creditworthiness of the entity are a common risk for most networks.  

Competition in your footprint: If you are the first high-speed provider in a region, your penetration and ARPU will typically be high. As a second competitor enters, both revenue metrics will decrease. If you are a provider with outdated technology, you are at risk of being overbuilt by a competitor with better technology. 

An example of the Served data and capabilities in CostQuest’s OnLook GIS Analytics app

Example of examining the competition – In the selected area above, one out of five of the service providers in the area are offering Fiber to the Premise, the other four are either offering licensed fixed wireless, coax cable, or copper. If you were to enter into this specific market with high-speed internet via Fiber, you may consider yourself the second high-speed entrant in this market. This example also demonstrates the complexity of assessing a competitive situation:  

  • Should the fixed wireless be considered high-speed in this context? 
  • As the copper provider loses customers it may be able to provide higher speeds to the customers that remain.  

The specifics of each individual scenario will create competitive risks that smart providers will understand. 

Lack of business experience: Operating a network is hard, smaller companies and municipalities may successfully build their network but can struggle to get customers with a difficult and confusing buying experience. Or they may misprice their service. 

Industry-wide trends: Demographics and technology have many consumers cutting the cord. Wireless technologies may take customers with a lower investment required. These factors move more slowly but can affect the entire industry.  

The best way to factor in uncertainty is usually to consider the potential impact of key risks. What happens if it takes an extra 18 months to finish building? What happens if a competitor enters the region in 2 years? 

You may run sensitivity analyses or ‘worst case scenarios’ to consider the financial impact. You can also adjust discount rates to measure increased risk. 

Context and Purpose Determine the Telecom Network Valuation Approach

Now with the key factors identified, how do we use them to determine value? 

All valuations and appraisals have a purpose. Different purposes will dictate different approaches to determining value. 

  • A Fair Market Value appraisal for property tax purposes may consider only the tangible asset value already invested and look at the Capital Costs that would be required to recreate. 
  • A business plan for expansion into a new market by a telecom company will consider the capital cost to build the network and compare it with the time it will take for the profits (customer revenues less operating costs) of the network to repay the capital costs and the cost of capital required by your investors.  
  • An investor considering acquiring an available telecom company may consider the ongoing cash flow being produced and the market multiple to be applied to the returns. 

Whatever the situation, understanding the context and specifics of what you are trying to do is as important as understanding the drivers of value. 

Conclusion Telecom Network Valuations allow you to make better business decisions

Capital and resources are always in short supply and understanding the four key factors that determine a telecommunications network value allows you to focus and make better decisions.  Providing a better opportunity to capture the actual value of a network business and ensure the best chance of a profitable investment. This holds true whether you are considering making an acquisition, expanding to a new market, or upgrading service within your footprint. The next step is to turn the concepts here into actual numbers in a forecast or estimate. You’ll want to look at actual and forecasted results for your company, and publicly available information for other telecommunication companies.  

Valuation and appraisal solutions are the core of CostQuest’s services business, with over 30+ years of experience assisting large service providers and governments in understanding the costs and conducting Telecom Network Valuations for property tax, mergers and acquisitions, financial reporting, policy decisions, and many more.  

Feel free to get in touch with us for more help and questions at marketing@costquest.com.  

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