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.

Practical Implications of Pareto, Rule of Three, Winner Take All

Any market researcher, studying any particular market, will tend to find something like a Pareto distribution often applies: up to 80 percent of results are produced by 20 percent of actors. Some might call that the rule of three. 

Market share structures in computing, connectivity and software tend to be fairly similar: leadership by three firms, corresponding to the rule of three. 

“A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest,” BCG founder Bruce Henderson said in 1976.  

Codified as the rule of three, the observations explains the stable competitive market structure that develops over time, in many industries. 

Others might call this winner take all economics.  

Consider market shares and installed base in the U.S. home broadband market (including small business accounts). Of a possible total installed base of 122 million locations, 90 percent of the installed base is held by 15 companies. 

Just two firms have 52 percent of the installed base of accounts. 

Broadband Providers	Subscribers at end of 2022	Net Adds in 2022
Cable Companies
Comcast	32,151,000	250,000
Charter	30,433,000	344,000
Cox*	5,560,000	30,000
Altice	4,282,900	-103,300
Mediacom*	1,468,000	5,000
Cable One**	1,060,400	14,400
Breezeline**	693,781	-22,997
Total Top Cable	75,649,081	517,103
Wireline Phone Companies
AT&T	15,386,000	-118,000
Verizon	7,484,000	119,000
Lumen^	3,037,000	-253,000
Frontier	2,839,000	40,000
Windstream*	1,175,000	10,300
TDS	510,000	19,700
Consolidated	367,458	724
Total Top Wireline Phone	30,798,458	-181,276
Fixed Wireless Services
T-Mobile	2,646,000	2,000,000
Verizon	1,452,000	1,171,000
Total Top Fixed Wireless	4,098,000	3,171,000
Total Top Broadband	110,545,539	3,506,827
source: Leichtman Research Group

The point is that when tracking market developments, the big broad trends are discernible from understanding the actions, strategies and results of a mere handful of firms. And while the full range of “big company” strategies, opportunities and actions can vary substantially from those of perhaps hundreds to thousands of small firms, the trends that move the needle financially typically can be gleaned from following just a relative handful of firms. 

In other words, the business “laws of motion” are dictated by a relative handful of actors, even in markets with thousands of contestants. 

That might seem unimportant. For market analysts, it is a foundational assumption.

AI Gold Rush Exists Because of the "Rule of Three"

The present generative artificial intelligence "gold rush" exists for a good reason: the Rule of Three. In most instances, a stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest,” BCG founder Bruce Henderson said in 1976. 

The caveat is that the rule does not work as well to industries that are unstable or heavily regulated, such as investment banking; consumer electronics; some parts of the IT software and services business; life insurance and parts of the telecommunications industry.

Industry	Top Three Players (Approximate Market Share)	Rule of Three Applies?
Automotive	Toyota, Volkswagen, General Motors (~30%, ~12%, ~10%)	Generally applies
Smartphones	Apple, Samsung, Xiaomi (~40%, ~25%, ~15%)	Generally applies
Soft Drinks	Coca-Cola, PepsiCo, The Coca-Cola Company (~40%, ~25%, ~15%)	Strongly applies
Airlines	Delta Air Lines, United Airlines, American Airlines (~15%, ~14%, ~13%)	Applies with nuances due to consolidation
Fast Food	McDonald's, Yum! Brands (KFC, Pizza Hut, Taco Bell), Restaurant Brands International (Burger King, Tim Hortons) (~15%, ~14%, ~12%)	Does not apply
Cloud computing as a service	Amazon Web Services, Microsoft Azure, Google Cloud Platform (~30%, ~20%, ~15%)	Generally applies
Retail (e.g., Online Fashion)	Amazon, Inditex (Zara), H&M (~40%, ~15%, ~10%)	Generally applies

Sometimes known as “the rule of three,”  he argued that stable and competitive industries will have no more than three significant competitors, with market share ratios around 4:2:1.

So one has to assume the same pattern will emerge for frontier GenAI models as well.

In 2023 alone, some 123 artificial intelligence foundation models, the building blocks of many modern AI applications, were released. In 2024, there may well be thousands of models in use, including both the smaller number of "foundation models" that lead the market, a larger number of general-purpose generative AI models that might be important in verticals, plus the many thousands of models that have been customized for use by specific enterprises.  

Virtually nobody believes all the would-be foundation models will survive, long term. And that fuels the "gold rush" mentality: only a few foundation models are likely to emerge as eventual market leaders, as tends to be true in any market.

While application markets tend to exhibit more diversity over the long term, compared to operating systems or semiconductor chip ecosystems, a reasonable argument can be made that, over the long term, just a handful of leading foundation models will lead the market, as that is the pattern in computing in specific and almost all markets generally.

Among the dozens of large foundation models that seem to be most used are the GPT series (OpenAI); the Claude series (Anthropic); PaLM and Gemini series (Google) as well as the LLaMA series (Meta). But there also are many small language models developing that generally are designed for specific purposes. 

In healthcare, SLMs might be used for medical document analysis, patient record summarization or perhaps research. In finance, SLMs might be used for fraud detection, sentiment analysis of financial news or risk assessment.

For customer service, SLMS might be used for chatbots. The point is that where LLMs were previously required, in the future SLMs might suffice. 

SLMs will be favored because they cost less. Training and deployment are more affordable, for example, since the models do not have to be trained on much-larger datasets. In some cases, SLMs can be developed faster. 

   

SLMs will be favored for industry-specific use cases, as well.  

Because there is less processing, there also is less energy consumption. Some argue SLMs also enable more privacy. 

Bouygues Telecom Tries to Disrupt the French Market

We may soon see a test of the rule of three and rule of four in the France telecom service provider market, as Bouygues Telecom tries to move up from the third spot to number two. The rule of three suggests a stable French telecom service provider market would be led by three firms. The rule of four suggests the market share structure will be 4:2:1 (40 percent, 20 percent, 10 percent) in terms of shares held by the top three firms.

That is quite different from today's structure.

According to Bouygues, its mobile market share (excluding M2M accounts) stood at 16.4 percent in 2020. At that point, the firm was in fourth place behind Iliad with 18 percent, SFR with 24 percent and Orange with 30 percent share. Adding the M2M or internet of things accounts, Bouygues already had reached the third position in market share. 

The more important part of the story is that Bouygues has been gaining market share for at least a decade. In 2010 it had about eight percent share. The conglomerate’s mobile business has the highest growth rate of Bouygue’s businesses. Average revenue per account also has been rising. 

The company had 12 million mobile customers (excluding M2M) in September 2020, an increase of 455,000 new customers since the end of 2019, of which 181,000 were in the third quarter.

Bouygues Telecom had 1.4 million fiber to the home customers in September 2020, with 378,000 new adds since the end of 2019. The FTTH penetration rate continued to rise to 34 percent  versus 22 percent a year earlier. 

source: Seeking Alpha 

The company had a total of 4.1 million fixed network customers in September 2020. The roll-out of Bouygues Telecom’s FTTH network is accelerating with 15.8 million FTTH premises marketed at end-September 2020 versus 11.8 million at the end of 2019. 

Bouygues has raised its target to 27 million premises marketed by end of 2022.

After an acquisition adding two million accounts, Bouygue should have reached about two percent, possibly three percent additional share points. So the assault on number two SFR, and supplanting that firm, means an overall shift of about four points: moving from 20 percent to 24 percent, ideally based on taking two points of share from SFR in the process. 

When Bouygues is able to take customers directly from SFR, it gains double: growing its own share and reducing SFR’s at the same time. 

The other issue is that, depending on how one wishes to count market share, fixed network revenue and accounts might prove important. In fact, some might argue that Bouygue’s ambitions are based on gains in fixed network customers and revenues more than mobile accounts and revenues. 

In principle, a jump into second place--by market share--is possible. The French mobile services market is not so stable that movement at the top of the market is largely impossible. It would be quite difficult indeed to make such a move if Orange had 40 percent share rather than 30 percent. 

Were that the case, One could then expect SFR share to be about 20 percent or so, with a third provider having 10 percent or perhaps a bit more. Under such conditions, it is next to impossible for number three to supplant number two, and virtually impossible to overtake the leader. 

So far, though, Bouygues Telecom has been able to steadily grow both mobile and fixed network accounts, gaining market share in the process.