Does U.S. Telecom Industry Skate on Thin Ice?

Do service providers actually make much profit? That might seem, at first glance, a silly question, looking only at quarterly or annual financial statements. To be sure, some contestants--typically the smaller providers in any industry segment--face clear challenges.

But some might argue the problems are greater than often perceived. And that means the opportunity or danger--depending on one's point of view--are quite high. The easiest example is the mobile handset business.

In some ways, handsets are fashion items. For that reason, device market share can change dramatically. That has applied to whole handset brands as well. In fact, some might argue leadership changes about every seven years, in the handset business.

Whether that applies to Apple is an open question at the moment, as so far Apple seems to be defying past rules of thumb. Apple's sales velocity and prices seem to defy rules of thumb that suggest prices "should drop," margins "should" weaken and growth rates "should" slow.

Whether Apple is the exception that proves the rule is one question. But other big questions "should" be asked. Among those big questions are the shape of future telecom service provider markets.

Product share is one issue. Share of revenue is another question. Who the leading contestants will be is yet another question. The three biggest U.S. communications service providers, by revenue, now are AT&T, Verizon and Comcast.

The point is that, for the first time ever, a "cable TV company" is in the top ranks of telecom service providers. One might suggest even that could change, in a decade or two.

On the service provider side of the business, one might argue, disruptive market share change occurs "rarely," even if the relative shares of existing providers does shift, largely because of acquisitions.

But huge market share shifts now happen rather routinely at the product level.

In fact, at least historically, one might argue that discontinuities--distinct or sharp breaks--in the telecom business are relatively rare. One might also argue that discontinuities now are more frequent in the telecommunications business.

In fact, it now is possible to argue that truly significant changes now can happen in the service provider business  over periods as short as one decade.

Consider the matter of fixed network voice services in the U.S. market. Compared to 2000, U.S. incumbent telcos in 2013 served about 42 percent of accounts sold in 2000. In other words, over about a decade, U.S. fixed network telcos lost half of their voice lines.

In some cases, providers arguably have lost as much as 70 percent of fixed network voice lines.

In the U.S. market, 27.6 million total lines were “lost” marketwide, a shrinkage of about 17 percent of total lines in the market. In other words, aggregate demand dropped by that amount.

There also was contestant market share change. Over the 2008 to 2013 period, cable TV voice accounts grew from about 20 million to 30 million, for example.

The point is that a triggering disruptive event–the Telecommunications Act of 1996, did not immediately produce huge changes in market structure or revenue shares.

In the years between 1996 and 1999, new competitors gained about four percent share.

From 1999 to 2003, a period of three additional years, competitor market share rose from four percent to 13 percent.

From 2003 to 2005, competitors gained four more share points.

After 2008, competitor share--aided perhaps b y a new way of counting--climbed to 27 percent, according to FCC data.

The point is that significant changes now can happen over a decade, and big changes over periods of perhaps two decades.

But market share might not tell the whole story. Some might argue that firms such as Verizon might have lost money with their investments in fiber to the home platforms, for example.

Some argue that is why Verizon is willing to shed even FiOS lines to concentrate on mobility.

The more shocking argument is that Verizon and others might lose money even on their mobile business.

That raises a disturbing question: what happens when even dominating scale is not enough to ensure robust earnings by the largest service providers?

What changes in business model might be needed? And by the time fifth generation mobile networks actually arrive, will even the biggest mobile service providers have a defensible “moat” against new competition?

And, and if tht is a real possibility, why do regulators spend so much time burdening contestants that, one might argue, are going to face sustainability challenges even greater than they face at present?