Is Sprint Moving to Take Over Clearwire?

Many observers were convinced Softbank would not have taken control of Sprint without a clear path to own Clearwire as well, and that might be the impetus for a Sprint bid to buy the remainder of Clearwire it does not already own. Reuters reports that Sprint is in talks with Intel Corp. and Comcast Corp. to buy out their stakes in  Clearwire.

Intel and Comcast own a combined basis roughly 12.4 percent of Clearwire's total shares. Aside from plans Sprint might now have for a new assault on the U.S. mobile market, something most expect Softbank to attempt,   the U.S. market is showing other signs of instability or attempted disruption.

There are growing signs that the U.S. mobile service provider market is unstable, in terms of market structure, and on the cusp of changes that could include a significant wave of provider restructuring, despite the failure of the AT&T bid to buy T-Mobile USA.

"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.

Oddly enough, to some of us the new stresses resemble the earlier transition from dial-up Internet access to broadband access. In this case, the transition is from feature phone to smart phone business models.

In that earlier transition, many suppliers that had made a business of supplying dial-up access found they no longer could compete in the broadband business. Now, in mobile, it appears that the cost of supporting handset subsidies is pinching operating revenue, while the cost of building fourth generation networks likewise will hit earnings.

Of the "big four" U.S. mobile carriers, only T-Mobile USA seems to have experienced a subscriber loss.

In its second quarter of 2012, AT&T added 1.5 million net new customers. Verizon Wireless added 1.2 million net new subscribers. Sprint added postpaid net additions of 442,000 postpaid net additions. But T-Mobile USA, one the "big four" U.S. mobile service providers, lost 510,000 subscribers in the first quarter.

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.

A study undertaken by Tellabs suggests that mobile service provider profitability could become extremely challenging for some mobile operators within three years, with costs surpass revenues for many operators.

In North America that could happen by the fourth quarter of 2013 or as early as Q1 2013. Developed Asia Pacific service providers could see problems by the third quarter of 2014. In some cases this could happen as early as Q3 2013, Tellabs said.

Service providers in Western Europe could run into trouble by the first quarter of 2015. In some cases this could happen as early as the first quarter of 2014.

Vivendi's SFR mobile operation reportedly has been talking to Iliad (owner of Free Mobile) about a merger. SFR also apparently is in talks with French cable operator Numericable about a merger of SFR with Numericable as well, Reuters reports.

Those talks indicate that, after a period of relative stability, mobile market structure, in France and elsewhere, might be changing, because of market saturation and competition.

In many Western European markets there are four, and sometimes five facilities-based mobile  service providers. That was sustainable in an earlier period where the mobile market was growing.

But the issue has been whether four to five contestants are  "too many" suppliers for a stable market. In the United Kingdom, the formation of EE is another example, while in the U.S.market Sprint and T-Mobile USA are the contestants seen as inevitable parts of a future market consolidation.

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. Consolidation is the result.

The point is that mobile markets are heading for a period of greater instability and possible change than we have seen for some time.