Who Else Might Bid for T-Mobile US?

Over the coming months any number of “transformative transactions” in the U.S. media and communications market are going to be floated. T-Mobile US making a bid to merge with Sprint is among the earliest such proposals. There will be many others. AT&T making its own bid for T-Mobile US now is speculated. Whether that once-rejected combination has a chance is the big question.

The antitrust situation would not seem to have materially improved since both AT&T bids to acquire T-Mobile US and Sprint’s later effort both foundered. Ironically, T-Mobile US success in recent years might conversely demonstrate the value of maintaining more-robust levels of firm diversity in the mobile market.

Vertical combinations (AT&T-Time Warner; Dish Network-Verizon) likely would have an easier antitrust clearance hurdle, since those combinations would not generally reduce the number of competitors in the market. That was the case for Comcast-NBC Universal, for example.

In addition to Sprint, T-Mobile US, Dish Network (potential acquisitions, generally), some content entities, device suppliers or over-the-top distribution assets almost certainly will emerge as potential merger candidates, as buyers or sellers

Almost nobody considers Comcast, AT&T or Verizon a likely seller, under any reasonable set of circumstances. Charter Communications, a rumored seller, also could easily be a buyer, longer term.

One could easily argue that none of those acquisitions (distribution with media; distribution with distribution) are as much strategic as tactical, aiming to achieve revenue and customer mass immediately, rather than representing investments in future services (internet of things, machine learning, immersive content).

The issue is that no set of investments in “future” opportunities, no matter how strategic, would help the big players with revenue mass or customer base in the near term. And that is what the coming consolidation wave will aim for.

Sprint Merger with T-Mobile US Would Not Likely be Approved

At the risk of being later proved quite wrong, a prediction: the proposed SoftBank offer to merge Sprint with T-Mobile US “ain’t gonna happen,” new administration or not, because the antitrust objections likely already are too great.

Many speculate that a more business-friendly presidential administration will make a difference. That might well be a positive, for other firms that want to merge. It will not be a positive for this specific transaction, for simple technical reasons. The big problem is not necessarily the Federal Communications Commission, but the Department of Justice, which will use its standard antitrust tools, as well as the Federal Trade Commission, which also uses the same screening methodology for evaluating market competition.

To be sure, Sprint attorneys will be told to argue for a new definition of the market Sprint and T-Mobile US are in. That could lead to a different set of numbers. Some day, that might even be an argument many would accept. It is unlikely to be the case here, as the Sprint merger with T-Mobile US would be a classic horizontal combination in an existing market that has not yet been transformed in ways that obliterate the differences between media firms and content distributors.

Or, Sprint attorneys might argue, the “relevant market” is voice services, triple play or access services. That argument has yet to win acceptance, and though it someday will happen, that time is not yet here.

Sprint merging with T-Mobile US already would fail to pass the numerical measures DoJ--and many other antitrust regulators globally--always use.

The Herfindahl-Hirschman Index (HHI) is a commonly accepted measure of market concentration,  calculated by squaring the market share of each firm competing in a market, and then summing the resulting numbers, and can range from close to zero to 10,000.

The closer a market is to being a monopoly, the higher the market's concentration. A market with just one supplier (such as the old monopoly telephone business) would have an HHI value of 10,000.

If there were thousands of firms competing, each would have nearly zero percent market share, and the HHI would be close to zero.

The U.S. Department of Justice considers a market with an HHI of less than 1,500 to be a competitive marketplace, an HHI of 1,500 to 2,500 to be a moderately concentrated marketplace, and an HHI of 2,500 or greater to be a highly concentrated marketplace.

As a general rule, mergers that increase the HHI by more than 200 points in highly concentrated markets raise antitrust concerns, as they are assumed to enhance market power under the section 5.3 of the Horizontal Merger Guidelines jointly issued by the department and the Federal Trade Commission.

Consider a hypothetical four-company market with this shape:

Firm one market share = 40%

Firm two market share = 30%

Firm two market share = 15%

Firm two market share = 15%

Such a market would be deemed "highly concentrated," though at a relatively low level by global standards, with an HHI in the 2950 range.

The current structure of the U.S. mobile market (third quarter 2016) looks like this:

Firm one market share = 35%

Firm two market share = 32%

Firm two market share = 17%

Firm two market share = 14%

The point is that when the DoJ looked at the proposed AT&T acquisition of T-Mobile US, and the proposed Sprint acquisition of T-Mobile US, DoJ found that the HHI scores already had become too concentrated. When the AT&T deal to buy T-Mobile US failed, the HHI was something in excess of 2800.

Matters were not too different when Sprint tried to buy T-Mobile US last time.

To be sure, HHI scores--in and of themselves--are not the reason the mergers were scuttled. But the burden of proof on the acquirer becomes more acute. And given T-Mobile US success in driving more competition, the burden of proof arguably will be higher than in the past. True, Sprint will argue that the newly-merged company could, in principle, attack with more ferocity.

That could happen. But most observers would likely agree that the big advantage of having only three providers leading the market is that the firms could improve profit margins, and therefore competitive attacks would moderate. That certainly is what every equity analyst is likely to argue.

Providers globally might well agree with the “less is more” argument, from the standpoint of competition becoming more sustainable, as three big profitable firms are better than four, where at least one of the firms becomes increasingly less able to sustain itself at a profit.

But the market environment, and thinking about the market, likely will incorporate the likelihood of new competitors entering the market in a way that strengthens Sprint and T-Mobile US without reducing the total number of leading contenders. Those vertical combinations obviously will include the assets of Charter, Comcast and Dish Network.

That noted, antitrust officials will have to work with “what is,” not “what could happen,” or even “what everyone expects will happen.” So the  big issue will be prospects for sustaining competition in a market with three providers, not four. That will be a tough sell.

Did AT&T Miss Boat on "Unlimited?" Not Really

Some will quickly look at AT&T unlimited service pricing as compared to plans offered by T-Mobile US, Sprint and Verizon and conclude that AT&T “made a mistake” by not pricing more aggressively. Most likely, AT&T is pricing at a point it believes best balances protection of its existing customer base with the ability to compete with the other offers.

Some will note that the cost for a single line is higher than comparable offers from the other three providers, but the four-device plan is equivalent to Verizon's offer, and priced above the plans offered by T-Mobile US and Sprint. That would be consistent with AT&T’s larger strategy of protecting its postpaid, multi-line accounts and allowing “lower value” accounts to churn off.

As in most saturated markets--especially those that are essentially zero-sum markets--the providers with the largest market share have the most to lose, but the least to gain, from marketing wars including price attacks.

In any very-competitive zero-sum market, the suppliers with the largest account bases have much more to lose than gain, once marketing wars erupt, simply because there is no pool of new customers to get, and all changes essentially involve market share shifts.

The problem is easy to illustrate. When voice over Internet Protocol first began to get traction, it might have seemed logical to argue that legacy voice providers should immediately move to match features and prices offered by the VoIP attackers.

That would not have been a new suggestion. Basically, AT&T and others faced precisely the same problem when competition in long distance services erupted in the 1980s: how aggressively should market leaders move to match features and prices offered by the discounting attackers?

AT&T and others essentially chose a strategy of harvesting profits as long as possible, matching rival offers to the extent necessary to slow the rate of customer and revenue decline, but not enough to match those offers head to head.

In the case of VoIP, most legacy voice providers essentially chose not to match the VoIP offers head to head, but to maintain prices on the legacy products and accept market share loss over time.

In other words, the strategy is to preserve prices and profit margin at the expense of market share, with a clear understanding that, over time, the legacy product market will reform, at lower overall prices and lower margins. In the meantime, total return is better when a slow decline (without slashing prices and profits) is the business objective, not an effort to maintain share.

There are other obvious implications to be gleaned from the present mobile marketing wars. In effect, T-Mobile US and Sprint now have embraced strategies of permanently lower levels of revenue and lower prices, with more value. It is long distance and VoIP all over again, in the mobile services segment.

The market for mobile access is reforming, and the “best” strategy for Verizon and AT&T is to maintain the slowest possible rate of market share decline, with the lowest-possible price declines, for as long as possible, while replacement revenue streams are built.

Neither Verizon nor AT&T want to be the price leaders. They will respond, in a general sense, to price and value attacks, without attempting to do “anything” necessary to maintain market share. The objective will be to achieve a modest decline rate, for as long as possible.

After all, the attacks will increase, in the future, as Comcast and Charter enter the market, even as AT&T and Verizon fend off current attacks from T-Mobile US and Sprint.

This is a market positioning problem we have seen before, with rather consistent fundamental strategies on the part of market leaders and attackers.

Will Unlimited Usage Kill the MVNO Business?

Though some might disagree, some executives in the communications business never have trusted business models built on wholesale access. Cable TV companies, fixed network telcos and mobile providers are primary examples.

One early example of just how much a wholesale-based business model can collapse was what happened to the dial-up internet access industry when the switch to broadband happened.

In the dial-up era, ISPs did not need to buy access on a wholesale basis from the carriers. They were able to use any available facilities and then just sell the internet access as an app that rode on the existing network.

The shift to broadband destroyed the business model, as for the first time, ISPs had to buy wholesale access from facilities-owning firms. That destroyed the business model.

The same thing happened when wholesale tariffs were changed in the U.S. “competitive local exchange carrier” business. CLECs rented access and full services from telcos, and then resold them to consumers and businesses, on the strength of wholesale discounts of about 40 percent.

When the rules changed, and discounts narrowed, the consumer services business model evaporated.

In the mobile services business, we might see something similar, if unlimited usage plans remain the industry staple. The reason is that mobile virtual network operators are likely to find they cannot maintain a business model when they must buy wholesale access that allows a retail unlimited offer.

It has happened before, and might well happen again. At the end of the day, in competitive markets, facilities ownership is the only way a competitor can control its own costs, long term. Cable executivs call that "owner's economics."

Global Telecom Revenue Growth Rate Drops Below 1%

In an era where all of its legacy revenue streams are mature and declining, with profit margins compressing, the core issue is the viability of the business model. Clearly, the key strategic challenge for virtually every operator is to discover or create brand-new lines of business, at scale, to replace revenue sources that are dwindling.

Looking only at the revenue top line can be misleading, in that respect, as aggregate financial results from some 68 service providers show a slight upward trend in recorded revenue since 2009 (roughly the trough of the Great Recession of 2008).

An important caveat is that results are far different in growth regions such as Asia or Africa, and mature regions such as Europe, North America and the Middle East.

Total recorded revenue has grown largely because hundreds of millions of new mobile customers are being added in some regions and because mobile data still drives incremental revenue growth in many markets. But rates of growth, in aggregate, are lower than top-line revenue suggests. That will matter as mobile market subscription growth slows, in Asia and eventually, Africa.

Also, the revenue growth rate has been far less robust than expected in the recovery from the Great Recession. In part, some would argue, that is because the global economic growth recovery has been tepid, as well, and telecom revenue has tended to correlate with economic growth.

Still, In three major regions (North America, Europe, Middle East), compound annual growth rates have even been behind growth of gross domestic product, according to analysts at Telco 2.0 Research.

source: Telco 2.0 Research

Project Loon Now Can Target Coverage, Reducing Size of Balloon Fleet an Order of Magnitude

Project Loon engineers now have tweaked control algorithms to allow the sending of  small teams of balloons to form a cluster over a specific region, Google now says. As a direct result, Project Loon will be able to “put together a Loon network over a particular region in weeks not months, and it would be a lot less work to launch and manage,” according to Astro Teller, Google X captain of moonshots.

The key breakthrough is that engineers can now harness wind currents in any direction--north, south, east or west, to essentially create a circular flight pattern over any region. “This is a shift from our original model for Loon in which we planned to create rings of balloons sailing around the globe, and balloons would take turns moving through a region to provide service,” said Teller

That is expected to have direct economic repercussions, allowing Loon to reduce the

number of balloons needed in the fleet as well as reducing the cost of deploying each network. Project Loon believes the reduction in total number of balloons will be quite substantial, reducing balloon fleets by as much as an order of magnitude (10 times).

source: Google

AT&T Launches New Unlimited Plan for All Customers

AT&T is  launching a new unlimited plan, available to all consumer and business postpaid AT&T wireless customers. AT&T earlier had offered an unlimited plan for AT&T customers who also buy DirecTV service.

The new consumer plan includes unlimited talk, text and data on four  lines for $180 a month. After 22 GB of data usage on any included device, AT&T says it may slow speeds during periods of network congestion. The plan uses the stream saver function, that supports DVD resolution.

The plan also includes unlimited calls from the U.S. to Canada and Mexico, and unlimited texts to over 120 countries.

Plus, customers on this plan can talk, text and use data in Canada and Mexico with no roaming charges when they add the Roam North America feature for no additional charge.