The recently announced tie-up between Sprint and T-Mobile US attracted widespread commentary, with opinions polarising around two opposing camps.
Consumer champions and a number of industry commentators have raised concerns about a potential reduction in competition in the US mobile market and the specific risk lower income consumers, in particular, will lose out as prices rise.
In contrast, T-Mobile and Sprint (and some commentators) have been keen to promote the deal as an enabler for jobs and investment, and specifically as a major catalyst for 5G deployments in the US. In the words of T-Mobile CEO John Legere: “Global tech leadership for the next decade is at stake…only the combined company will have the network capacity required to quickly create a broad and deep 5G nationwide network in the critical first years of the 5G innovation cycle – the years that will determine if American firms lead or follow in the 5G digital economy.”
It is worth taking a step back and seeing the deal for what it is: a classic case of mobile consolidation between two challenger operators. Unlike the previously rejected AT&T and T-Mobile merger in 2011, the current deal would see the number three and four players consolidate to create a potentially more effective competitor with greater scale.
Despite the success of T-Mobile’s “uncarrier” strategy and resultant market share gains over the last few years, along with a recent improvement in Sprint’s own operating metrics (after several years of market share losses), both companies remain sub-scale relative to the two dominant players. AT&T and Verizon jointly control just under 70 per cent of the market’s total service revenues (see image below, click to enlarge), with scale benefits also allowing them to generate higher EBITDA and free cash flow margins.
But, beyond the fact of the matter, what else can we say? Are there any lessons which can help sort out the polarised consumer-centric versus investment-centric views? While we might not be able to crown either camp a winner, there are interesting parallels with the mobile operator merger completed in Austria in early 2013 which took the country from four to three carriers.
In a highly competitive market with aggressive price competition, two smaller players (Orange and 3 Austria) were struggling to gain scale and justify network investments necessitated by the upgrade cycle from 3G to 4G. The merger was ultimately approved but this was contingent upon the imposition of a number of remedies. These included the sale of some spectrum holdings; the opening up of the network to new MVNOs; and the reservation of new spectrum for a planned new entrant network operator. The latter remedy did not ultimately take effect as no fourth player entered the market.
As part of the merger approval process, 3 owner Hutchison made a number of claims in support of the deal, including that it would help to deliver a number of efficiencies including improved 4G coverage and quality of services. These claims were rejected by the competition bodies as not passing the burden of proof.
The traditional approach by European competition authorities when reviewing this, and similar, mergers has been to focus on consumer pricing, particularly likely short-term movements in price. However, a recent report by GSMA Intelligence took a different approach, retrospectively reviewing developments in the Austrian market and with a focus on the impact of the merger on other consumer benefits, including network coverage and quality (upload and download speeds).
The results of the analysis showed that the four-to-three mobile merger in Austria intensified competition in quality-related aspects and the resultant three-player market delivered more widely available and faster 4G services than those experienced in four-player markets. It also showed that a merger between the two smallest operators in Austria allowed them to significantly outperform other operators in Europe with a similar position in the market.
There is then a clear potential read across from the situation in Austria in 2013 (with operators needing to invest in 4G network deployments) and the timing of the recently proposed deal between Sprint and T-Mobile. The US (and other regions) are in the process of contemplating the business case and rationale for 5G deployments and the economic benefits of potential technological leadership in the race to 5G. Certainly the merger pitch from two companies differs from the one normally given to the financial markets: promises of more jobs and higher investment levels as opposed to redundancies and cost savings.
Although the outcome of the regulatory review remains uncertain, the example of the Austrian mobile merger introduces a wider range of factors for consideration and could play to the more business-friendly environment promised by the current administration in the US. Certainly the Austrian example suggests that T-Mobile’s comments on 5G investment levels should not be dismissed lightly.
– David George, head of consulting, GSMA Intelligence
The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.