T-Mobile/Sprint is just one example of many mobile telecom operators around the world trying to consolidate. What are people missing when they evaluate this merger?
|The media is full of redundant, uninformed stories about the T-Mobile/Sprint deal in the United States. Most journalists, regulators, and analysts are rational, critical thinkers, but when it comes to consolidation, many suddenly become converts to numerology, espousing the superstition of magic numbers of firms in a market. The latest criticism is that American mobile market is like the 19th century railroad. This view is wrong for many reasons. A railroad, once built, can last for one hundred years; a mobile network, only a fraction of that time. If not continually upgraded, a mobile network will expire like a carton of milk. It’s no longer a differentiator to have a 3G network. If one operator in a market upgrades to 4G/5G, the rest must follow. Customers won’t drink curdled milk.
Strand Consult has followed the industry consolidation for some 20 years and observes that many have an outdated view of competition. This research note compiles some of Strand Consult‘s observations on consolidation over the years, notes which have been used by antitrust authorities, investors, consolidators, and parties wishing to extract remedies from the merger. These research notes cover strategy, MVNOs, prepaid, remedies, and international comparisons.
Is T-Mobile’s strategy unique?
There is no doubt that T-Mobile and John Legere have impacted the US mobile market, but some have an illogical view that the maverick CEO will trans-mutate into Dr. Evil upon finalizing the merger and abandon the strategy that made T-Mobile a success. There is nothing unique in what John Legere has done; he just copied what challengers did in other markets around the world. See this note from 2012. T-Mobile is probably on the right track in the US. The question is why it took them and CEO John Legere so many years to copy what other operators have done successfully around the world. Based on the knowledge and insight in the US market, here is Strand Consult’s view today The historical facts show that the T-Mobile/Sprint merger is good news for competition, innovation and infrastructure investment in the USA.
What is the role of mobile virtual network operators (MVNOs) in the mobile market? Are they mini-operators or just distribution channels?
There are many clever MVNOs around the world. Strand Consult was first to describe the MVNO market, chronicling the birth of no frill MVNOs like Telmore and CBB in Denmark to the rare cases of MVNOs which have become network operators. See Facts and Fiction about the MVNO market and French Free Mobile has successfully launched a real MVNO strategy and in just a few days changed the French mobile market for ever. Denmark offers textbook examples of the MNVO market. MVNOs can be dangerous for mobile operators that do not understand the value of having an aggressive MVNO strategy.
How does the prepaid market impact the overall mobile market?
Strand Consult has conducted workshops on the prepaid market for two decades. The market’s challenges are described here. 10 Mega-trends on prepaid markets – Mobile Operators around the world are facing huge challenges. For some time, the prepaid and postpaid market have been converging, becoming a hybrid market. Denmark, one of the world’s most mature and advanced mobile markets, demonstrates that the gap between pre and postpaid has narrowed considerably. Authorities are wrong to think that the prepaid is a separate and distinct market for people of low-income. The prepaid market is highly diversified and sophisticated, attracting customers at all income levels.
What is the role of remedies in consolidation and how should they be designed? What are the downsides to remedies?
Like flies at a BBQ or ants at a picnic, interested parties come out of the woodwork to extract value from mergers. These opportunists are frequently successful, winning regulatory favors and payouts they could never earn through the proper running of their own businesses. Telecom operators, regulators and competition authorities need to update their knowledge of what creates competition in the market. Here are four factors that should be considered when regulators define consolidation remedies
What can be learned from internationally from mobile market consolidation?
Many US and EU journalists are similarly ignorant of each other. A typical story about the US in a European newspaper is a copy-paste Google-translated version of an American article. Many Americans think Ikea is the capital of Scandinavia. Simply put, much is lost in translation when generalizing about the 50 states of the US and the 28 nations of the EU. Both sides can make factual errors and incorrect claims when describing the mobile market. Strand Consult follows many markets closely, offering specific, highly detailed discussions of each market and the proper context for analysis. Here are a few examples.
1. The EU Competition Authority’s Role in the Failed Telenor Telia Merger in Denmark and the Consequences for Europe – Post Mortem Part I
2. The consequences of the failed Telenor Telia merger in Denmark and what it means for mergers in the UK, Italy and the global telecom market – Post Mortem Part II
3. Documentation: EU competition authorities’ email to Strand Consult reveals lack of evidence for statements used to support denied mobile industry mergers. Margrethe Vestager’s DG Comp is sabotaging future telecom industry desired by DG Connect
4. Leaked documents from Hutchison / Telefonica deal in UK shows EU competition authorities don’t understand telecom markets. DG’s Comp’s inability to update analytical framework dooms mobile mergers
Antitrust authorities have a tough job to weigh the evidence. Their tools are blunt; the information is not specific to their questions; and their assumptions are outdated. As such, it’s tempting to fall back on “heuristics” or rules of thumb because doing the proper analytic job doesn’t always lead to clear conclusions. Overtime, however, measurement improves, and there are opportunities to review past decisions.
Regulators love to celebrate decisions when they’re right (even if they can’t prove it was for the right reason), but they rarely take responsibility for when they’re wrong. Consider the Blockbuster-Hollywood Video merger in 2005, the classic horizontal merger in the brick and mortar retail DVD business. Using antiquated theories and definitions, authorities denied the merger, which was predicated on joining forces to develop a digital alternative to Netflix, which had launched a video streaming service.
There are no DVD stores anymore, and Netflix is a behemoth with 125 million customers and a $150 billion market cap. It could swallow Sprint and T-Mobile to create an exclusive distribution channel for its own content. Things might be different today if Blockbuster and Hollywood Video had been allowed to try. The authorities who made that decision got to keep their jobs, but tens of thousands of workers, particularly minimum wage earners, were displaced because of regulators’ decisions. Regulatory errors are frequent, real, and harmful.
To learn more about evidenced-based competition policy and consolidation in mobile markets around the world, contact Strand Consult.