Will Scale or Scope Characterize Mobile Strategies Next 5 Years?

Leading U.S. service providers have for more than a decade focused their growth strategies on "scope economies" rather than "scale economies." Simply, "scope" means you sell more products a relatively fixed set of customers. "Scale" means you get more customers. 

For leading cable companies, the problem is partly that the U.S. Federal Communications Commission has clearly signaled that no single U.S. cable company will be allowed to control more than 30 percent of all U.S. cable subscribers. For Comcast, that essentially has meant that no more cable companies can be acquired.

AT&T recently encountered resolute opposition to its proposed acquisition of T-Mobile USA, a move that would have lead to even more industry concentration than the U.S. Department of Justice believes is permissible. 

But there are other issues. As cable has encountered market share erosion, first to satellite providers and now to telco TV providers, and as telcos have lost share to cable voice services, each type of firm has had to lean on "scope" mechanisms, namely selling additional services to a smaller number of customers. 

Amidst growing signs that the U.S. mobile service provider market is becoming unstable, in terms of market structure, the issue is what will happen, in terms of growth strategies based on either scale or scope. 

What appears to be clear is that AT&T and Verizon will have trouble justifying growth by acquisition, namely, adding more subscribers by buying additional mobile companies, with their customers. Even Sprint might have trouble convincing regulators it can combine with a firm as large as T-Mobile USA. 

That suggests that mergers to create larger entities will have to happen either as Sprint or T-Mobile USA buy smaller regional carriers; as regional players combine; or as new contestants enter the market in part by buying up existing mobile carrier assets. 

There could be a new wave of mobile virtual network operators as well, but those efforts will not likely disrupt market structure in terms of shares held by the top four providers. The point is that, at least for the top four mobile service providers, scale no longer will be the normal and primary means for revenue growth (with the exception of Sprint or T-Mobile USA buying smaller regional mobile service providers). 

Instead, scope economics will prevail. In other words, adding more subscribers won't go too far before regulatory resistance is encountered. Instead, the top four providers will have to add more services. 

What does seem likely is a scale approach by newer entrants and the regional providers, below the big four players. 

 "What is clear for now, in our view, is that the current strategy, indeed the entire current business, isn't working," said Craig Moffett, an analyst at Sanford C. Bernstein. 

Moffett seems to be referring to the whole business operated by regional U.S. wireless carriers. To be sure, Moffett has been saying that the U.S. mobile business is saturated since at least 2009. 

The immediate stress is heavy for the regional mobile providers, often using prepaid models. Regional or prepaid service providers clearly have had a tougher 2012 than had been the case in the mid-2000s, for example. 

Leap hasn't been profitable since 2005, for example. MetroPCS profits dropped 63 percent during the first quarter of 2012. That suggests to some observers that consolidation among the regionals is inevitable.