Can Sprint and T-Mobile US Ever Catch Verizon and AT&T?
Paradoxically, as in the fixed network business, it is likely that only a few service providers can flourish, long term, even if conventional wisdom suggests more providers is to be desired.
And, one might add, part of the growing instability in the U.S. mobile market has yet to surface, namely the entry of new providers, such as one or more cable TV companies entering the market with widespread Wi-Fi-first access models.
New Street Research apparently estimates that U.S. cable companies could price Wi-Fi-based mobile phone service at a 25 percent discount to existing wireless carriers and still generate profit margins well north of 30 percent by doing so.
In other words, Sprint and T-Mobile US do not face AT&T and Verizon, they also eventually are likely to face Comcast and possibly Google, Apple or some other app provider.
The problem in most fixed network markets is that capital investment barriers are so high regulators essentially have had to rely on wholesale mechanisms to support competition. Ironically, such moves also tend to depress facilities investment.
The issue is how to best promote effective long-term competition in the mobile market, a question that can be summarized as "what is the minimum number of providers required to sustain long term investment and innovation?"
And some argue the current structure of four leading providers cannot last, based on disproportionate differences in revenue, profit and ability to continue investing in next generation networks.
The single most important present issue is the structure of the U.S. mobile market, which now has become unstable, paralleling in many ways instability in markets such as those of France, where regulators likewise are facing the challenge of sustaining investment and competition with a possibly smaller number of leading providers.
“We believe Sprint and T-Mobile’s lack of capital investment in network infrastructure and spectrum over the past five years were the primary reasons for AT&T and Verizon’s market share gains during that period,” say analysts at BTIG Research.
Likewise, an analysis by New Street Research makes the same point.
"Our analysis shows that neither Sprint nor TMUS have enough revenue to cover their fixed costs and it is highly unlikely that both will capture enough new revenue to do so," New Street Research analysts say. “There simply isn't enough revenue in the industry for four carriers to cover their fixed costs unless there is a significant shift in market share."
You can guess that the analysts believe there is scant chance the two smaller U.S. mobile service providers can do so.
The analysts also say it is possible that a reduction in U.S. mobile service providers still could provide consumer benefits. In three markets--Netherlands, Greece, and Austria--the number of nationwide competitors dropped from four to three and average pricing in the markets declined 15 percent to 40 percent after the consolidation.
"If the companies merge now, while they are in relatively good shape, the merger will result in lower costs in the context of an improving business, which our data suggests should lead to investment and lower prices," New Street Research believes. On the other hand, "If the companies are only permitted to merge when one has faltered or failed, the combined company will be less well-positioned to compete against the two well-funded incumbents."
Common sense might lead one to conclude that four providers indeed are better than just three. But long term stable markets might ultimately require contraction to just three providers. And it might matter when such contraction occurs.