From Mac Guides
The word Modem comes from the phrase "Modulator de-modulator." It connects two computers via a telephone line by converting (modulating) a digital signal to transmit over an analog medium (the telephone). On the other end, the other modem will receive the signal, and then de-modulate it to reconstruct the digital data that was sent.
With the introduction of Broadband internet, the use of modems is quickly decreasing, however they are still widely used.
Wikipedia article about modems.