What is Impact of Industry Concentration on Competition?

Mobile virtual network operators--especially smaller MVNOs--are warning that a proposed merger merger between T-Mobile US and Sprint will lead to more concentration and higher prices. Such warnings are as expected as the touted advantages claimed by industry segments evaluating any major changes in industry policy.

In some ways, it cannot be argued that the proposed merger makes the market more competitive. By definition, the merger reduces the number of major competitors in the market. Granted, on some measures the U.S. market still is less concentrated than some other major mobile markets.

And there is an argument to be made, in many segments of the communications business, that greater scale has become a fundamental requirement. And, in principle, a bigger number-three contestant could use its greater scale to push even harder at industry pricing levels and the value proposition.

But few observers seem to expect more competition as the end result of a merger between Sprint and T-Mobile US.

Even if one is of the opinion that merger rules are more relaxed now than under the prior presidential administration, some quantitative tests always are used by the Department of Justice when evaluating proposed mergers, and immediate past precedent might be a key issue.

The proposed merger of AT&T and T-Mobile in 2011 was scuttled because the Hirschman Herfindahl Index (“HHI”) would have increased by 700 points in an industry already classified by the HHI and highly concentrated. The HHI is a standard tool used by regulators globally and will be used again as Sprint and T-Mobile US propose to merge.

It is not incorrect to read the DoJ’s objections to that earlier merger as opposition to any merger between two of the four nationwide providers of mobile wireless services: AT&T, Verizon, T-Mobile and Sprint.

The proposed merger of the third- and fourth- largest U.S. mobile companies would increase the HHI by over 400 points, meaning market concentration, in an industry already deemed highly concentrated (if less concentrated than some other markets), would increase.

“Like the failed AT&T and T-Mobile merger a few years ago, the proposed merger between Sprint and T-Mobile will be presumed anticompetitive and thus heavily scrutinized by antitrust authorities,” says George Ford, Phoenix Center for Advanced Legal and Economic Public Policy Studies chief economist.

To be sure, executives from T-Mobile US and Sprint say the additional scale provided by the merger will allow the bigger firm to continue to be aggressive in attacking prices, or will allow the firm to invest in 5G at a faster rate.

But I have yet to find an equity analyst who believes that will happen. Quite the reverse is expected, in fact: less price competition in the U.S. mobile market. An oft-noted conclusion is that a bigger number three firm would have less need for price cuts as a primary competitive weapon. Not is that view confined to equity analysts and market researchers.

Nor will some market watchers think the recent DoJ opposition to the AT&T acquisition of

Time Warner--a vertical merger of the type that tends not to be challenged--is a good omen, on that score. If DoJ objects to a type of merger that usually is not viewed as problematic, what is DoJ going to do with a type of merger that, by definition, will be viewed as problematic?

To be sure, the telecom industry virtually always has been concentrated for most of the past 150 years. But the level of concentration grew more than 100 percent between 2000 and 2014.

Percent Change in Market Concentration and Regulation 2000-2014
Industry	HHI Index
Hospitals	11%
Health Insurance	79%
Banking	100%
Telecom	101%
Airlines	16%
Auto Industry	-34%
Energy	31%
Average Change	43%

source: American Action Forum

In U.S. Market, Tier Ones Have to Grow by Acquisition

If you run a consumer fixed line communications business, flat video entertainment revenues are not the best of all possible outcomes. But compare that sort of performance to the fixed line voice business, or to mobile segment revenues, which have driven revenue growth at most telcos for the past two decades.

Flat video entertainment revenues have to be evaluated against what is happening in other lines of business, as well. In the U.K. market, telecom revenue has dropped 1.7 percent per year since 2012. Globally, we might be nearing an absolute industry peak revenue situation, after which it is possible global connectivity revenue could start to gradually decline.

The trend to price retail services at marginal cost, a trend I refer to as near-zero pricing, is part of the backdrop, leading to declining average revenue per user.  

Consider that AT&T’s fixed network voice revenues are dropping about 18 percent annually, costing that firm about $1 billion a year in lost revenues that need to be replaced.

source: Seeking Alpha

And what is happening in the mobile category? Revenue arguably is declining there as well, for both AT&T and Verizon. And that raises the biggest strategic issue for most communications service providers: what must be done if connectivity revenues have reached their historic peak?

In other words, what if communications connectivity has already, or will soon, reach the top of its life cycle, with a period of decline to follow?

That arguably is the case for most communications categories, ranging from linear video to voice to mobile service. Only internet access revenues have continued to grow, driven by growth in emerging markets and by a shift to higher-speed tiers of service in some developed markets.

source: Seeking Alpha

source: Seeking Alpha

That is why some believe big changes are coming. A massive wave of consolidation will help surviving service providers sustain revenue growth by acquisition. There will be some benefits on the cost side as well, as additional scale is gained. That might account for the biggest single change in firm economics over the next decade.

But eventually, when that trend as run its course, there will be no alternative to adding additional lines of business “up the stack” or elsewhere in the communications, app, platform, device and content ecosystems, still the era of communications growth will have ended.

Though mobile services have been the global revenue driver, we are approaching a time when every human who wants to use mobile service does so, and eventually we will be at a point where every human who wants to use internet access will do so.

That is not to say all firms are in the same position. Smaller firms can take share from larger firms. Mobile substitution will shift additional share from fixed to mobile networks. Specialist firms of all types might continue to grow in their niches, up to a point.

And the same growth by acquisition dynamics that will apply for tier-one telcos will hold for all specialist firms as well, for some time.

Still, eventually, if the “connectivity” business continues to shrink, growth will have to be sought elsewhere. And that probably has to happen with acquisitions, rather than internal growth, for reasons of scale.

By definition, communications firms with flat to declining revenue cannot generate growth organically. It will have to be bought. Even T-Mobile US, which continues to take market share from its competitors, sees acquisition (Sprint) as the best way to achieve much more scale.

	Subscribers (millions)	Net Adds (thousands)	Postpaid Adds (thousands)	Postpaid Churn
Verizon	152.65	37	199	0.97%
AT&T	147.26	499	46	1.02%
T-Mobile	75.62	777	686	1.08%
Sprint	53.79	92	87	1.63%
U.S. Cellular	5.05	-	-	-

source: Morgan Stanley

Since most of its competitors have churn rates similar to its own (the exception is Sprint), T-Mobile US gains on its larger competitors simply because one percent losses at a firm the size of Verizon or AT&T represent a larger number that at any smaller firm.

That means T-Mobile US arguably stands to gain share, even at the same churn rates as its larger foes. Still, eventually, all U.S. mobile service providers have to deal with saturated markets and declining average revenue per account.  

Though Comcast and now AT&T are criticized by some for expanding into content ownership, those are prudent moves (some argue) to reposition revenues away from an exclusive reliance on communications products and sources.

source: Morgan Stanley

source: Morgan Stanley

source: Morgan Stanley

What if it is Verizon, Not Google Fiber, that Disrupts U.S. Internet Access?

Within a few years, we likely will count Verizon as the largest U.S. “overbuilder,” not firms such as Google Fiber, Ting or others. The reason is that Verizon is launching an assault as a fixed wireless overbuilder in a number of larger markets, including Los Angeles and Houston, as well as Indianapolis and Sacramento, Calif.

So, in a major irony, it might be Verizon, not Google Fiber, that dramatically disrupts the U.S. internet access market, at least the fixed network part of that market.

Generally speaking, earlier overbuilders have chosen rural areas, small towns or suburban communities as venues. Google Fiber was among the few to have tackled a whole major market such as Kansas City.

Verizon’s attack will matter for a few reasons. Verizon has the resources and brand name to shift national market share in the fixed networks business. Up to this point, no overbuilder has attacked markets big enough to change national market shares and subscriber counts.

And, in its chosen markets, Verizon will be challenging several of the biggest ISPs in the fixed networks business: Comcast, Charter and AT&T. This is not an incremental approach in out-of-the-way or small markets, but a deliberate effort to take significant market share, at scale.

Just how much share Verizon can get is the issue, and how soon it can do so. Verizon suggests its fixed wireless opportunity is about 30 percent of all U.S. homes, so possibly 35 million to 39 million U.S. homes, depending on which estimates one uses.

Market share will matter. New Street Research predicts that Verizon could achieve 24 percent market share in those markets. That would change national internet access market share by about seven percent (using a base of 114 million U.S. homes), or some eight million accounts.

Of course, Verizon might do better than that.

TDS in Sun Prairie, Wisc. gotten 46 percent market share in its first year of operation as an overbuilder That is practically unheard of.  

With possibly hundreds of local governments actively considering launching their own municipal internet access services, and with a growing number of private internet service providers also looking to enter as the third providers in existing markets, it looks as though many more U.S. communities will see a trio of fixed network service providers over the next decade.

How well they might fare, and what the implications are for incumbents, are logical questions.

Ting, the internet service provider that overbuilds telcos and cable TV firms, has argued it can get to about 50 percent market share in perhaps five years in virtually all of its internet access networks, with a first-year goal of 20 percent share.

EPB, a municipal service provider in Chattanooga, Tenn., is the poster child for government-operated triple-play providers, and often is said to have 46 percent market share. That is true if one counts units of service (video, voice, internet access), instead of household account share.

The issue is that when service providers sell multiple services, one has to decide how to measure market share: by units sold, by homes that are active accounts or some other measure. These days, the preferred metric typically is units sold, not homes.

EPB’s internet access share might be about 27 percent, its video share lower than that. Comcast might have 61 percent video share, while EPB might have 36 percent video share.

AT&T also competes in that market, but seems to have low share of video and internet access.

Other earlier overbuilders, focusing on video entertainment, might have been able to reach 10 percent to 15 percent market share.

Many of us would be surprised if Verizon failed to break the 20-percent share market rather quickly. And that means other major ISPs--AT&T, Comcast or Charter--are going to lose that share.

Ironically, it might well be Verizon--not Google Fiber--that pushes the major U.S. ISPs to upgrade to gigabit access on a faster tempo.

Ting Internet Gigabit Network Launches in Centennial, Colo.

Ting's latest gigabit network, in Centennial, Colo., is launching commercial service in an area where Comcast already sells gigabit service, aided no doubt by the assistance of a municipal backbone network built by Centennial for about $5.7 million. That network branches out from the city municipal building. Future fiber lines run along East Dry Creek, East Arapahoe and East County Line roads.

Ting has argued it can get to about 50 percent market share in perhaps five years in virtually all of its internet access networks, an ambitious goal. Comcast's Xfinity gigabit service is already available in Willow Creek for the same monthly rate as Ting will offer.

At least at this point, the share gains will come disproportionately from CenturyLink, which does sell gigabit speeds in Centennial, reaching what appears to be a small percentage of locations, by at least one report.

source: Memim

The Willow Creek neighborhood will be lit first, followed by Walnut Hills and Hunters Hill in Centennial.

The City of Centennial and Ting Internet executed an agreement for Ting’s lease of fibers in the central ring of Centennial’s fiber optic backbone. Ting will lease 12 fibers from the City’s 432 strand fiber backbone for a term of 20 years. When completed with west and east rings, the network will total 50 route miles.

The City will receive a one-time payment of $302,500 for the lease as well as an annual payment of $4,325 (with a three percent annual escalator) for operations and maintenance, the city says. The carrier-neutral network also can be used by other entities who want to pay for access.

In 2013, voters in the 110,000-person suburban city approved a $5.7 million municipal project building three fiber-optic loops that new internet service providers could extend into neighborhoods to bring services in competition with Comcast and CenturyLink.

Ting is pricing its gigabit-speed service at $89 a month, plus modem rental of $9 monthly or a one-time $200 purchase for a modem. And then there’s installation that could run $200, though the company offers promotional rebates that may offset installation charges.

CenturyLink's website doesn't show it offers gigabit-speed service in the Willow Creek neighborhood.

Does Faster Internet Access Cause Economic Growth?

It always is difficult to assess the potential impact of faster internet access in any area. “Areas that receive investment in infrastructure tend to do so because they are expected to grow rapidly in the future,” say researchers at Ipsos MORI.

The point is that investment follows growth potential. So investment might not “cause” growth, but reflects expectations for growth. And that might be an issue with any studies that suggest faster internet access causes economic growth.

The relationship could be merely correlative.

Researchers estimate that U.K. government support for “Superfast” (24 Mbps or faster) internet access between 2011 and 2016 lead to 2.5 million premises getting such speeds that would not have done so without the program. On average, speeds were boosted from about 20 Mbps up to more than 60 Mbps, the report says.

Perhaps another one million premises received superfast coverage one to two years earlier than they would have done otherwise, a report by Ipsos MORI says.

The perhaps more-controversial or potentially disputable portions of the report deal with economic growth outcomes.

source: BDUK

“It is estimated that postcodes benefitting from subsidized coverage saw employment rise by 0.8 percent and turnover grow by 1.2 percent in response to improved infrastructure,” the report says.

Some 49,000 additional jobs were created in areas that got 30 Mbps or faster services. “The total turnover of firms located on those postcodes also expanded by almost £9.0bn (per year) in response to the upgraded infrastructure,” the report argues.

“The productivity of local economic activity, as approximated by turnover per worker, also increased by 0.32 percent as a result of faster available download and upload speeds, accounting for £2.1bn of overall turnover growth,” the authors assert.

“Over 80 percent of these impacts were driven by the relocation of firms to postcodes receiving subsidized coverage,” the report says.

The estimates are fine as far as they go, but arguably overstate the benefits. To sure sure, the faster internet might actually be “causal” if the firm relocations actually were triggered by the availability of faster internet access.

But other areas then also lost those firms, so the net national gain is arguably close to zero, for the activity gained and lost, in local areas. Report authors specifically say they have not discounted the impact of firms relocating from the analysis.

“Making superfast broadband speeds available also appeared to raise the productivity of firms that did not change location while the program was delivered,” the report says, and that is a possibly more-significant finding.

“It was estimated that subsidized coverage raised the turnover per worker of these firms by 0.38 percent, broadly consistent with other estimates of the impact of faster broadband in the UK, equivalent to £1,390 in output per firm per annum,” the report says.

“Assuming the results reflect underlying efficiency improvements,” it is estimated that the program led to a net increase in national economic output (GVA) of £690m by June 20166. The key word there is “assuming.” We do not actually know if the increase happened, or if it did, that those increases can be causally related to faster internet access speeds.

Subsidized coverage also supported “reductions in unemployment in the areas benefiting from the program.” That is probably what one would expect if a number of new firms relocated to the subsidized coverage areas.

It always is difficult to prove causation in such cases, to be sure.