U.S. Mobile Sustainable Market Share Might Require Consolidation

Huge fixed costs explain why the number of facilities-based access providers seems always to be a small number, no matter what regualtory frmaework is employed, economists at the Phoenix Center for Advanced Legal and Economic Policy Studies  have argued. In fact, the starting point for analysis should always be that there were be only a few facilities-based providers of any communications or video service, notably in the terrestrial facilities business, and especially when referring to networks using some form of wired access. See read more here

By direct implication, excessive competition will, over the longer term, "always" revert to a small number of providers, in large part because only a small number of providers can actually invest and make a profit. To be sure, the analysis is a bit different in a multi-product market, than in a single product market. In other words, the hurdle rates for a fixed-line provider with just one product will have different dynamics than markets where each contestant sells three to four anchor products.

The obvious example is minimum market share in the fixed-line market where entertainment video, voice and broadband access are the anchor products. An executive from a rural cable TV provider, at a time when the sole product was "cable TV," once was asked what would happen if the company's penetration rate of homes dropped from 70 percent to 65 percent. "We'd be out of business" was the reply, so sensitive was that firm to the arrival of a single competitor, when there was but one product.

In today's market, where three products are key, the hurdle rate can be far lower, in part because even a smaller number of subscribing households might buy two to three products, allowing any single contestant to survive or thrive on a smaller base of customers. In other words, were that same company able to sell voice, broadband access and video, meaning three separate revenue streams, even shrinkage of video customers substantially below 65 percent would not be a catastrophy, provided an equivalent or greater revenue stream could be generated from sales of the additional products, even to fewer numbers of customers.

Still, there are limits. Consider a sample market where entry costs are equivalent for all facilities-based contestants at 15 units. Where one firm operates, it gets 100 percent of possible profits. Where there are two contestants, profit falls to 40 units. Where there are three contestants, profit falls to 20 units per firm. With the potential entry of a fourth firm, profits drop to 12 units, leaving the fourth firm under water. The fourth firm rationally decides not to enter the market.

The particulars of each real-world market will diverge from the hypothetical example, but the point is that there are some clear limits to the potential profitability of contestants in the fixed-line access business, even when triple play services are possible.

Verizon Wireless has the highest market share in the U.S. mobile market. It also has the highest profit margin. AT&T is second in share, and second in margin. Sprint is third in share, and third in margin.