Research Notes

The historical facts show that the T-Mobile/Sprint merger is good news for competition, innovation and infrastructure investment in the USA

Since the announcement by T-Mobile/Sprint, the media has exploded with predictable stories that the merger is bad for competition. These are stories we hear every time has been consolidation in the US mobile market. There has been significant consolidation over the years, and consumers have never had it so good. Network investments is high, about one quarter of the world’s total, and consumers get increasing value over time. Competition on the mobile market in the US has never been tougher than it is today.

The US consumer market for mobile encompasses about 385 million subscribers with an average revenue per user (ARPU) of $37 a month, a figure that dropped by 4.6% last year. Annual churn is around 20%, which means that 78 million mobile customers switch mobile operators every year. It’s not the number of mobile operators that drive competition, but the technological development. This can be illustrated by the simple fact that only two people are needed to start a fight in a bar. So it is with the mobile market.

Consider Verizon’s rude awakening when they realized that their CDMA technology was not compatible with the cool smartphones on the GSM/WCDMA/LTE market. It wouldn’t have mattered if there were 100 CDMA mobile operators. People wanted the technology of the cool smartphones, so Verizon had to convert their CDMA network to a high-speed LTE network with 4G coverage. Verizon’s shift to 4G/LTE forced the other US player in the same direction. It was not the number of players that triggered an arms race, but rather the technological development that made the US the leading 4G nation which supports 5 million jobs and adds $475 billion annually to the economy.

Sprint, having had a smaller customer base, fewer resources, and some strategic mistakes, did not do so well in the transition from CDMA to the race for 4G. Put simply, it is a dead man walking today. Sprint’s CAPEX over time looks like a mountain range, peaks and valleys. It does not have the necessary capital to be a national mobile operator. It’s only options are to be regional player or be a part of a consolidation.

It could be that T-Mobile is paying too high a price for Sprint, but on the other hand, T-Mobile can reap the most synergies from the merger, so the price may be justified. A merger will solve many of Sprint’s challenges to build a national network that can compete with Verizon and AT&T. Cable companies Charter and Comcast also create competition on the mobile market with new technologies and distribution, but even if one of their acquired Sprint, they would still have to make significant investment to acquire spectrum. As such, T-Mobile is best positioned to deploy the assets of Sprint quickly and efficiently. 

America’s mobile market also includes the competition from disruptive technologies such as voice over internet protocol (VOIP) in Skype and online messaging such as WhatsApp. These apps have collapsed a what was once a major source of revenue for mobile operators in SMS and long distance calling to essentially zero.  The app market has been complemented by the growth and diversification of handsets.  Consumers have been enriched significantly by these hardware and software developments for which the foundation is next generation networks. In a converging world, the lion’s share of the profits have been reaped by Apple, Google, and Facebook. While mobile operators have invested the most among all players, their balance sheets have the thinnest profit margins.

The competition is even tougher today than in the 4G era because the US now faces competition from China. China is already leading on 5G with the US in 3rd place after South Korea. China is formidable in patenting 5G technologies, winning global investment, and creating the products, services, and apps that will make consumers adopt 5G. The US can’t afford to dither on unsupported claims on the optimal number of mobile operators in the market when China is eating its lunch.

As can be expected, a $26 billion merger will draw its share of rent-seekers and political opportunists. Compagnies will exploit the regulatory process to their advantage just as politicians will demand consent decrees that reward their cronies and enact policies which they could not otherwise pass through the electorate.

The US should not make the mistakes of Europe, which has systematically deterred consolidation. The EU is not only behind on 4G, but in pre 5G products and services. Rolling out 5G networks is not even a topic of discussion. The EU has a €150 billion gap which investors are not interested to fill. One need look no further than the rebuffed attempt to merge the 2rd and 3th mobile operator in Denmark in 2015, a merger which promised greater investment in rural parts of Denmark and greater competition to the only profitable player on the market, the incumbent TDC. Regulators demanded so many extreme remedies that the parties called off the merger. Today prices stand 15% higher and infrastructure investment has fallen. Danes are the worse off because Brussels mishandled and micromanaged competition. The press will continue to print myths and pre-baked narrative about the T-Mobile/ Sprint merger.  The don’t have the time or interest to investigate the history and facts from many other countries. Strand Consult, on the other hand, has followed the mobile market around the world for more than 20 years. In general where consolidation has been allowed, the investments are higher, the networks are more advanced, and the consumers enjoy better value. The T-Mobile/Sprint merger is great news for competition, innovation and investment in American infrastructure, and will help the US secure leadership in 5G.

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