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Emerald Group Publishing Limited
Copyright © 2012, Emerald Group Publishing Limited
The AT&T/T-Mobile USA takeover and its implications for consolidation of mobile markets
Article Type: Rearview From: info, Volume 14, Issue 2
A regular column on the information industries
As noted in previous “Rearviews”, the consolidation of national mobile markets has been an ongoing theme involving periodic battles between market forces and regulatory bodies. By and large, the desire/necessity to scale-up has been the primary driving force and the number of networks in advanced countries of any size has been reduced to three or four although, as in the recent case of Switzerland, there are increasing signs that lines are being drawn in the sand by regulators to prevent further shrinkage.
So it is appropriate to question whether recent events in the USA, and in particular the takeover bid by AT&T for T-Mobile USA, will provide the key to unlocking the probable future path of consolidation.
The obvious starting point is to ask whether the US market is representative of markets elsewhere in the world. If we restrict ourselves to the key structural elements – the number and relative size of national operators and the co-existence of regional networks – then the answer is broadly negative. In comparison with other developed markets, the USA is unusually large and consists of a mixture of national and regional operators of widely divergent sizes, a combination that can only be found outside North America in Russia. However, Russia has long had only three incumbent operators with (near-) national licences, all of which can reasonably be lumped together in the same size bracket. Fourth-placed Tele2 is growing fairly rapidly – in which respect it diverges from T-Mobile USA – but does not seriously threaten the incumbents in their key markets and there is no discussion of, or obvious need for, structural reform.
The situation in the largest emerging markets is extraordinarily divergent. In China, the market structure is artificial, being determined by the government which has opted for increased competition but only on its own terms – for example, technology-neutral licences are not favoured. Meanwhile in India, where licences are issued for 22 separate “circles”, something of a free-for-all has resulted in roughly 15 networks (two state-owned) with widely varying coverage. Some like Vodafone Essar and Bharti Airtel have (officially) more than 100 million subscribers whereas others are too small to survive independently, so a period of consolidation is inevitable, the outcome of which is for now unpredictable. Indonesia, with its ten or so networks, is also atypical.
Not surprisingly, therefore, the arguments surrounding the desirability or otherwise of the AT&T takeover of T-Mobile USA essentially ignore what is happening outside the USA – several years have passed since US operators pulled out of most of their overseas markets to concentrate on domestic competition including the likes of Puerto Rico.
But the absence of similar national markets does not preclude the potential relevance of the arguments put forward by the protagonists which relate to the proposed takeover of a fourth-placed operator, which has shown no subscriber growth for several years, by a second-placed operator roughly three times its size and only slightly smaller than the market leader. The result of a successful takeover would be to leave the new market leader one-third larger than its predecessor and more than two and a half times larger than the now third-placed operator. On the face of it, this would be fairly typical of other advanced markets but there are some mitigating factors, namely:
that the US market is much larger;
that AT&T and T-Mobile USA use the GSM family of technologies unlike Verizon Wireless and Sprint Nextel, so the takeover would leave only one GSM-based network; and
the merged entity would be able to leverage its (alleged) disproportionate share of available spectrum to its own advantage.
It is important to note first, that AT&T and T-Mobile USA have tended to focus on somewhat different customer segments – the former on (mostly contracted) high-end customers with smartphones and the latter on price-sensitive customers, mostly pre-paid, who are also targeted by the likes of Leap Wireless and MetroPCS. Second, whereas AT&T has extensive spectrum holdings in lower bands such as 700 MHz and 850 MHz, T-Mobile USA effectively only operates in the higher PCS and AWS bands where its spectrum is contiguous to that of AT&T.
Until recently, the Federal Communications Commission (FCC) has regarded the mobile sector as satisfactorily competitive, with both national and regional operators present in major markets. AT&T argues that T-Mobile USA has not exerted significant competitive pressure on AT&T’s operations in the past – and certainly less than the likes of Sprint Nextel or Leap Wireless – and is unlikely to do in the future since it lacks the resources to roll out a 4G network. In contrast, combining the two operators’ spectrum holdings would remove remaining capacity constraints and enable 4G (whether in the guise of HSPA+ or LTE) to be rolled out more quickly and efficiently.
The other arguments put forward in support of the takeover are broadly as follows:
Major markets would still be served by at least four operators (plus MVNOs).
AT&T has a disproportionate number of high-data-use customers and is running out of spectrum.
The spectrum being acquired from Qualcomm is TDD, not FDD as used in legacy networks.
AT&T needs to continue to operate 2G, 3G and HSPA+ networks and cannot easily re-farm them for LTE.
T-Mobile USA has sufficient spectrum for its current operations but has no plan to move on to LTE nor the funds to acquire additional spectrum specifically for LTE.
Much of the two networks’ spectrum is contiguous.
Considerable synergies would be available if the two networks were to be merged, in part because under-utilised combined legacy spectrum could be filled up and the overall surplus re-farmed.
Rural coverage would be improved and new jobs would be created.
The arguments put forward to support rejection of the takeover are broadly as follows:
Aside from Verizon Wireless, only one under-sized national operator, Sprint Nextel, would be left and its move into the 4G arena has been fraught with difficulties.
Sprint Nextel, Leap Wireless, MetroPCS and possibly other regional operators would have an incentive to seek further consolidation.
Verizon Wireless might seek to take over other operators, even Sprint Nextel.
The distinction between the services provided by AT&T and T-Mobile USA is not clear-cut, with T-Mobile USA’s high-end services competing on price with those of AT&T.
AT&T already has sufficient spectrum.
Its own recent strategy, including denial of fairly-priced data roaming, has been the cause of many of T-Mobile USA’s difficulties.
What is most interesting about the above, and why it may resonate in other countries where consolidation is under review, is the emphasis on 4G (For a discussion of 4G, see Curwen and Whalley, 2011). What AT&T has proposed is that, in assessing the degree of competition, the FCC should take into account not merely any spectrum already in use for high-speed data services but any other spectrum which might come into use in the near future – for example, re-farmed 2G/3G spectrum, mobile satellite spectrum, digital dividend spectrum and LTE/WiMAX spectrum (such as the 2.6 GHz band). It comes as no surprise that, in the case of AT&T, this proposal much diminishes the argument about AT&T hogging spectrum, but it is of interest to note that elsewhere in the world this spectrum – or at least such of it as has already been auctioned – has almost entirely been acquired by 2G incumbents. Furthermore, this trend is likely to continue.
What this implies is ambiguous. It is already evident that fourth-placed operators in developed markets are struggling badly. As things stand, some of them may be permitted to be taken over or, ultimately, they may shut up shop (which regulators cannot prevent). So if a line is to be drawn in the sand by a regulator, as in Switzerland, it is likely to be when there is an attempt to reduce the number of operators from three to two – or, in the case of the USA, given is relative size, from four to three. Because 4G licences are proving to be considerably cheaper than those issued for 3G, and because there is no visible threat from new entrants (which, with the arguable exception of Hutchison Whampoa, also failed to establish themselves in respect of 3G), third- and fourth-placed operators have an incentive to soldier on in the hope that competitive pricing of 4G services will improve their profitability. However, economies of scale and scope – for example, the ability to bulk-buy handsets at competitive prices – will remain in force and restructuring may simply be postponed.
Peter CurwenVisiting Professor of Telecommunications at the Department of Management Science, Strathclyde University, Glasgow, UK.
Curwen, P. and Whalley, J. (2011), “Mobile telecommunications gives birth to a fourth generation: an analysis of technological, licensing and strategic implications”, info, Vol. 13 No. 4, pp. 42–60