How Many U.S. Mobile Service Providers are Optimal?

With the recent mergers of T-Mobile USA and MetroPCS, and the purchase of Sprint by Softbank (assuming both transactions pass regulatory muster), there is once again an active discussion in many quarters about the future shape of the U.S. mobile service provider business.

What seems a safe observation, though, is that the number of successful mobile service providers will be few in number. The only question is “how few?” In many markets, there are four to five major providers, in terms of market share. But just how stable a market that is is questionable.

The Rule of Three holds nearly everywhere. While the percentage market share might vary, on an average, the top three mobile service providers control 93 percent of the market share in a given nation, irrespective of the regulatory framework.

Some might argue that scale effects account for the relatively small number of leading providers in many capital-intensive or consumer electronics businesses. At some point, the access business can have only so many facilities-based providers before most companies cannot get enough customers to make a profit.


Eventually, only the top three service providers control the majority of the market. There are niches that others occupy but they are largely irrelevant to the overall structure and functioning of the overall market.

Younger mobile markets can see five to six significant contestants at first, each with at least 10 percent market share. Over time, that winnows to three, history suggests. To be sure, there are plenty of markets where four to six major contestants operate, but even there, about three firms control most of the actual customer and market share.

The competitive equilibrium point in the mobile industry seems to when the market shares of the top three providers are 46 percent:29 percent and 18 percent, some might argue. At such a structure, the top three providers have 93 percent of the market.

That roughly corresponds with a rule of thumb some of us learned about stable markets. The rule is that the top provider has twice the market share of the contestant in second place, while the number-two provider has about twice the market share of the number-three provider.

That suggests the U.S. mobile market still has room to change. At the moment, Verizon Wireless has perhaps 34 percent share, while AT&T has about 32 percent share. Sprint has about 17 percent, while T-Mobile now has about 13 percent.

Classic theory would suggest the ultimate market share could approach a market with the top-three providers having a market share relationship something like 50:25:12.

Real markets always vary from “textbook” predictions, but a “rule of three” market structure seems likely.

That would have highly-significant implications for the four current U.S. providers that today represent 93 percent of all subscribers. One would presume the long-term viability of Sprint and T-Mobile USA is questionable.