What was unlikely several years ago looks very possible today. A merger that would reduce the number of competitive nationwide facilities-based wireless carriers from four to three is imminently upon us. Now, the real cartoons begin as the FCC and DOJ start to scrutinize this merger. With the rise of wireless resellers, the FCC and DOJ’s determination of competition may be different this time around.
These are areas of concern for wireless resellers.
MARKET SHARE
What changed?
In past merger reviews the facilities-based providers made up most of the market. Which left the Mobile Virtual Network Operators (MVNOs) very dependent on their host network carrier. MVNOs that resold those networks were included in the market shares of their host networks.
There are new entrants whose operations are independent of the facilities-based hosts, using other wireless links like Wi-Fi as the primary air interface to the handsets. Service providers like Republic Wireless and Google’s Project Fi are designed to use Wi-Fi first and then use a resale arrangement like an MVNO when the customer doesn’t have Wi-Fi coverage. In fact, Google’s Project Fi has two networks to choose from, and their handsets can pick the network with the better coverage. This routing decision made by the provider and programmed into the phone is a clear differentiator from the traditional MVNO model. These services can provide savings to customers who primarily use their phones at their home or office, and other areas where they have access to Wi-Fi, with incidental use of the phones away from Wi-Fi. These services have gathered a relatively small market share. Until now.
Comcast recently launched Xfinity Mobile in 2017, Charter launched Spectrum Mobile in June 2018. These services take advantage of the massive Wi-Fi hotspot footprints that the cable industry has built and share among each other. Xfinity Mobile has gathered approximately 577,000 new customers at the end of March 2018, which is a pretty good start. The “Wi-Fi First” model is clearly different from a traditional MVNO, and their market shares are independent of any host network(s) used to facilitate roaming beyond the hotspot coverage.
ONGOING CONCERNS
How should the antitrust regulators interpret the troubled condition of Sprint? The DOJ guidelines provide for concern when the Herfindahl-Hirschman Index (HHI), a measure of market concentration, changes by more than 200 points indicating a concerning increase in market concentration. The merger of T-Mobile and Sprint would increase the index by 431 points.
Sprint's market share has fallen to fourth place. They have less coverage area than the 3 other carriers and are falling behind on costly network upgrades. The company agreed to sell to T-Mobile without a premium which may be an indication that management and the major owners do not see much chance of digging out of the hole they are in. It could be an indicator that the company may not be around much longer if no merger occurs. If Sprint were to fail, the customers would be free to move to other carriers. It’s possible to assume that in a failure, Sprint’s customers may migrate to the other carriers in proportion of the carrier’s market share. If Sprint is denied this merger and allowed to fail, and if customers migrated to the remaining carriers in the same percentages that match their market shares, the index would increase by 660 points. In this scenario, the merger is more desirable than a failure.
It might be helpful to compare the options set before us. The first option is an orderly transition of Sprint customers to T-Mobile, which would create a stronger third market participant. The other option is a disorderly scattering of Sprint customers to other providers that would further strengthen the market share of the Verizon and AT&T. This second scenario shows Verizon market share increasing from 35% to 40%, AT&T market share rising from 34% to 38%, and T-Mobile rising to about 20%.
WIRELESS SPECTRUM
T-Mobile is growing fast and has been very aggressive in procuring spectrum. Sprint has a huge spectrum position, starting with the 1996 PCS spectrum auction, and through acquisitions, adding Nextel, Xohm and Clearwire positions.
Sprint’s spectrum position could be a huge benefit for T-Mobile’s future spectrum needs, and T-Mobile could avoid substantial spectrum costs by taking advantage of the spectrum investment that Sprint has already incurred. This would allow T-Mobile to devote more funds to network deployment. As with the market share case, if Sprint were to fail, its spectrum licenses could end up in an auction and going to the already advantaged carriers, rather than becoming available to other competitive carriers.
It’s highly likely that the new T-Mobile will be required to divest some spectrum if the merger is approved. With the possibly large divestitures, the regulators are likely to focus on enabling a fourth or fifth carrier to maintain or increase competition in the market.
Who might be interested in the spectrum? Possibilities include Ligado, the former LightSquared, which is eager to launch a nationwide wireless data network but has been held up by potential interference with inadequately filtered avionics in bands adjacent to its current spectrum. Perhaps US Cellular could cover the whole US. There could be opportunities for smaller regional carriers to expand and break out of the territories they are boxed into.
WHOLESALE MARKET SHARE
Sprint was the host network of choice for many of the early MVNOs. The market has changed as all of the facilities-based networks are now hosting MVNOs.
Using an unscientific sample of 81 MVNOs listed on Wikipedia, 18 use T-Mobile as its only host, 13 use Sprint, 11 use AT&T, and 10 use Verizon. Six carriers use only Sprint and T-Mobile. If there are no changes, that would mean approximately 37 MVNO carriers would be exclusively reliant on the New T-
Will this be considered a competitive market?
PREPAID MARKET SHARE
T-Mobile is the second largest prepaid wireless market provider with about 25% of the subscriber. Adding Sprint’s 11% will boost T-Mobile to 36% passing TracFone, the current leader, which has about 30% of the prepaid market. T-Mobile and Sprint also host a large number of MVNOs offering prepaid service. Their position among the price sensitive segment of the market is likely to be scrutinized. The owner of the Boost trademark, an Australian brand initially licensed to Nextel and now to Sprint, has offered to buy the brand and the customers
CONCLUSION
The market has changed enough that there is a reasonable chance the merger will be approved with some conditions. New entrants using new technologies, like Wi-Fi first, have expanded the number of market players with different technology. The continued degradation or failure of Sprint as a separate entity will likely strengthen the existing market leaders, increasing market concentration rather than generating a strong third player.
Also, it’s likely that enough spectrum will be divested to support another national carrier, such as Ligado or US Cellular. The other regional carriers may want to expand their networks to adjacent areas where they are boxed in by their licenses today. Additionally, wholesale service could be hosted by new providers on divested spectrum. However, until these new providers can develop into significant competition, regulators may require T-Mobile to honor current wholesale agreements for an extended period of time.
Regulators could require the merged entity to divest or sell some of the prepaid brands to reduce concentration. In fact, the founder of Boost expressed his desire to buy the brand and customers back and an MVNO arrangement is possible to achieve that.
It is likely that the merger will be approved with certain conditions. In any case, the interesting issues raised will make this merger a great spectator sport.
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