Scale Matters

The telecom business no longer is thought of as a natural monopoly, but retains the characteristic of a business where economies of scale matter. Were that not the case, dozens of networks would get funding in the local access business, for example, because the business case would be robust enough to support that level of competition.

In fact, economists and policy analysts at the Phoenix Center for Advanced Legal & Economic Public Policy Studies consistently have argued that the facilities-based access business is so scale intensive that only a few providers in each market can hope to make a business out of local access.

But there now are even more reasons why scale matters in the communications business. In many markets, revenue is flat or declining. Scale means the ability to grow, when organic growth is difficult.

Scale also means the ability to achieve greater economies of operating cost and some advantages in capital cost as well.

Under those conditions, scale is even more important, as it might make the difference between profit and loss, or a bigger profit compared to a smallish level of profits.

But scale also affects a firm’s ability to create or enter new markets, or create new applications. Only a large firm can hope to create an application business with enough users to sustain a good revenue opportunity.

Smallness, in other words, works against the ability to create compelling and profitable applications and services.

Our investment thesis is simple: scale matters," said Tribune CEO Peter Liguori.

Liberty Media Corp. John Malone, likewise says "the whole name of the game in the cable business is scale."

The only issue is how the need for scale will play out in other market segments.