In this recent ZDNet article by Larry Dignan, AT&T CFO John Stephens waxes about the inevitability of consolidation in the US wireless carrier market. While I definitely think he has a point, what struck me as quite astonishing was his conclusion that the right market size was “two or three and certainly not six or seven competitors in any market place”.
I do agree with Mr. Stephens that the US wireless carrier market is ripe for consolidation and I have a hard time to see long-term viability for non-national carriers. But to go from that vision to the conclusion that the right market size is two or three carriers is a big step.
A future where only two or three national carriers remain in the US market would be the competitive equivalent of a nuclear winter.
It would mean less competition, even worse service delivery than today at higher prices and even more lobbying of politicians to make sure that the carriers are not exposed to actual competition or oversight that would benefit the american people.
If you look internationally in the wireless space, the markets that are the most competitive on price, quality and services usually have at least four viable carriers in the market. If the number of carriers goes down to three or even two, competition, innovation and service quality usually suffers.
In my view this does not mean that there has to be at least four networks built in parallel (i.e. each operator owning its own network infrastructure), in fact I think several operators in the US market could benefit by moving towards network sharing, for example Sprint and Tmobile.
I strongly believe that the FCC and other government entities should take a proactive approach to ensuring competition and ensuring that there are at least four viable national carriers in the US market. This can be done in several ways.
1. Spectrum caps.
The FCC should look into the distribution of spectrum among carriers and limit the amount of spectrum a carrier can own in any given band and market. This will ensure that there is available spectrum to other carriers as well as limit spectrum warehousing. Spectrum warehousing by AT&T and Verizon (and other carriers) in the AWS-band has been very inefficient use of spectrum as well as had possible anti-competitive causes.
2. Spectrum build-out requirements.
When the FCC auctions or awards spectrum in the future, it should come with restrictions and demands that it will be put in use no later than a specific date. This will contribute raise the price of spectrum warehousing as well as promote rapid build-out of bandwidth.
3. Tough merger reviews.
While Mr. Stephens conclusion in the ZDNet article assumes that even the four national carriers will be allowed to merge in some fashion at some point, the disastrous AT&T & Tmobile merger attempt should point the way for regulators in the future to be very vigilant when it comes to these mergers. Basically they should not allow any mergers among the top four carriers.
4. Less focus on spectrum auction revenue.
The US spectrum market has over the years had a strong belief in the efficiency of awarding spectrum to the highest bidder, no questions asked. This has produced on the face of it some quite remarkable government proceeds for selling spectrum.
Unfortunately this belief promotes a very narrow view of what revenue the government can recoup as well as what effects it will bring to the consumers and people of America. While the billions that are paid for spectrum licenses in the US seems like a lot of money and intuitively one would think that it would be in the best interest of the government to maximize this revenue, the billions are actually peanuts compared to the positive effect on the US a more comprehensive awards process would have.
First, if you look at the margins of the top US carriers today, they are incredibly high, around 40%. That is not a sign of a very competitive market. If greater focus was spent on the competitive effects of spectrum distribution versus auction revenue, this could be a huge windfall for consumers and companies all over the country that uses or develops wireless services. If these margins fell to, say, 30% (a completely random number), as a consequence of increased competition, the year-over-year benefit to the consumers would dwarf the auction revenue paid upfront for the license.
Second, in addition to taking a more careful look at the competitive consequences of spectrum auctions or awards, the FCC and the government should take a more proactive approach to add conditions of use to the spectrum licenses. This could mean hard targets for when the spectrum should be in use as well as coverage targets etc. This would of course affect the auction revenue, something the carriers never fail to point out. But it would bring certainty to the market as well as huge benefits to the large portion of the american people who does not live in the large metropolitan areas and today suffer from a lack of access to the latest technologies.
I strongly disagree with AT&T and do not think that less competition is inevitable. It is a choice. If the US government, acting on the behalf of the people instead of the carriers, acts proactively to set a level competitive playing field, there is no reason why competition couldn’t increase instead of decrease.
And by the way, Mr Dignan, the wireless industry is nothing like the airline industry. Look at the margins and competition!