The Economics Behind Your Telephone

The economics behind the telecommunications industry is much more complex than one may imagine. It is easy to think that telecommunications industry operates by providing services, such as telephone calling, cell phone calling, and internet service, in exchange for payment from whom the service is provided. However, there is more than meets the eye. One of the most prominent aspects of economics is capital expenditure. More on this will follow. Advertising is also an important part of the economics in the industry.

Despite all the new services that the telecommunications industry offers, telephone calling is still the largest money maker in telecom. However, services that involve images and text, such as the internet, are expanding, and thus their importance in factoring into total revenue is growing. The telecommunications markets that most people are familiar with are small business and residential markets. However, these markets are the hardest markets to compete in because of the large number of companies in those markets. The key to success in these markets are brand name recognition (this is where advertising comes in), and productive means to bills customers. However, the preferred market is corporate customers. Corporations are more concerned about quality and high priced services, such as videoconferencing, than price. A lesser known market for telecom companies is to sell network connectivity, where one company pays another to use their plant, to others in their field.

Cost is a significant factor in telecom because of both technology updates and plant expansion. Technology updates and plant expansion both require the installation of new equipment, such as switches, which can be very expensive. Similarly, weather damages to above ground equipment, such as telephone lines, require the replacement of the damaged equipment. Also, telecom companies have to pay to send data and calls over another telecom company’s network.

Revenue growth is driven by the both the number of plans sold and the value of the plans sold. Telecommunications companies increase the number of plans sold in part by expanding their service coverage. They expand both the number of plans sold and the price of plans sold by expanding the services they provide. Data and image sending services bring a better price than only calling service. Finally, the price the customer pays for his or her plan will determine the number of plans sold and, in part, the value of the plans sold.

The supply of companies offering telecommunications services is increasing. As such the increased supply means a lower demand. This is because one telecom service, such as cell phone calling, is not much different from the next. As more providers enter the market, a main way to gain customers is by lowering one’s own price to be more competitive than other companies. Technology also affects the number of customers a company serves. Companies with cutting edge services in their field attract more customers than those who don’t. Those companies with these services also get paid more for those services than for standard services. However, as the supply of those services increases, the price of those services goes down.

Info from:

http://i.investopedia.com/inv/pdf/tutorials/industryhandbook.pdf