Monday, May 7, 2018

Is Sprint Plus T-Mobile US the Right Merger?

Arguments can be made about the impact--positive or negative-- of a successful Sprint merger on competitive dynamics in the U.S. mobile market. Additional arguments can be made about the sustainable structure of the mobile market, or whether the market will change in the future, in any case.

If so, is this the right merger for each firm?

Some might argue that competition actually is increased, as a merged entity will have the financial ability to match promotions by AT&T and Verizon; make investments in 5G; and enjoy other benefits of scale.

Others might argue that price competition likely will decrease. That is why equity analysts universally favor consolidation in the mobile market. “Less price competition” is the expected upside from the merger.

Yet others might argue that even if the number of suppliers decreases, that is the inevitable future, in any case, as Sprint and T-Mobile US are too small to challenge the other leaders if they remain independent entities.

Yet others might argue that additional competitors are coming, though not facilities-based providers, so the market might not ultimately reduce from four to three leaders.

A different class of arguments might be made about the minimum conditions for some amount of sustainable competition in the mobile market. Some believe the U.S. market cannot sustain four facilities-based suppliers. That is an empirical matter and will eventually be tested further, as new competitors enter the market.

The point is that many observers consider a three-leader market sustainable, while a four-provider market cannot be sustained.

Yet others might argue that the market itself is changing, as access services and content and app providers actually are starting to merge vertically. The Comcast acquisition of NBCUniversal was the primordial step. AT&T’s acquisition of Time Warner would be another illustration.

Hypothetically, other entities (tier-one app providers, device or platform providers) might eventually assume major roles in the access business as well. So, eventually, how we define “the relevant market” could be quite different.

Regulators taking a look at this particular transaction, though, will not have the ability to make determinations about market concentration based on those future developments, and will have to make decisions based on the “market as it now stands.”

It undoubtedly will be argued that the number of facilities-based national providers matters more than the number of mobile virtual network operators (MVNOs), because only a facilities-based supplier has the owner economics to attack pricing levels. Others will argue that the total number of potential tier-one retailers does suffice.

Yet others might argue that the relevant boost in competition will not come in the mobile arena at all, but in the fixed network realm, as 4G and 5G networks are used to displace fixed network services. That might be the case, though the relevant definition of “market” would be broader than “mobile only,” in that case. The challenge is that future competition is not the same as competition already existing in the market.

Up to this point, T-Mobile US has had no interest in that possibility, though obviously it will say it does have such interest, if only to boost its merger chances.

Some will argue the merger boosts investment in 5G. Much of that argument rests on the assumption that 5G will cost significantly more than 4G, something Verizon and AT&T already seem to dispute. And both Sprint and T-Mobile US have touted the speed with which they are independently moving to 5G networks, already.

It is reasonable that a merged Sprint and T-Mobile US could spend less than if each firm built separately, of course. In that sense (infrastructure deployment), a merger might bring more 5G competition, faster.

The more-immediate problem is that the merger will clearly increase market concentration using the traditional antitrust metrics used by antitrust officials.

Business strategy is the other big question. If, as even supporters might argue, the market is changing in ways that favor vertical integration of access and other assets (content, platform, device), a big horizontal merger is no more than an interim step. The next consolidation would have to have the new entity merging with one or more firms in the app, platform or device areas.

Some would argue the better outcome (from a strategy and competition standpoint) would be mergers by Sprint and T-Mobile US separately with “up the stack” partners that would position each firm for the future market (beyond simple mobile connectivity).

In other words, either asset, paired with a tier-one app, platform or device supplier would make more long-term sense. Sprint combined with T-Mobile US would be a bigger supplier of mobile access, but with no fixed network assets, no content assets, no platform capabilities or app assets that create a firm positioned to compete in the coming market.

That is a judgment call, but is the logical conclusion if one argues that a “mobile-only” connectivity position is not sustainable; that a “connectivity only” strategy likewise is unsustainable and that new revenue sources elsewhere than connectivity must be found.

Both Sprint and T-Mobile US need to merge, in other words.  Just not with each other.

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