What's been interesting about the feverish M&A landscape of the past year is that as many big deals have been rejected or abandoned as have been completed. The FCC rejected Comcast-TWC, and gave enough negative signals that Sprint did not move forward with the acquisition of T-Mobile. Instead, we have seen a series of smaller deals: Charter-TWC-Brighthouse; Altice-Suddenlink; and Verizon-AOL. So, we see an on-fire European operator dipping its toes into the U.S. broadband market, modest consolidation in the cable industry, and our largest wireless operator making a bigger play in OTT content and video/ad serving platforms.
As of mid-2015, in my view, we have an upside down industry structure. In wireless, there is almost too much competition. Margins at Verizon Wireless and AT&T are shrinking. Sprint is unprofitable and continues to struggle. T-Mobile has been successful in taking share and setting the tone of the industry to take share, flirting with profitability from one quarter to the next.
And in broadband, we have a lack of competition and choice. More than 50 percent of Americans only have one good broadband service available to them, and the U.S. is very much middle of the pack compared to other countries in terms of average broadband speeds. There is no prospect for broad-based change here. Things will get better in TWC land, as Charter will help some under-invested markets catch up with their broadband brethren. Fiber rollouts by Google, AT&T and others will continue to be a hodge-podge, benefitting the lucky few. For the incumbents, broadband is a great business to be in right now. It is the most profitable segment of the 'connectivity' business. The concern is that with the relative lack of competition, there is little incentive to dramatically improve service or make higher tier services more attractive. And with all the pressure on TV programming costs and the growth of OTT, consumers are likely to see higher broadband prices.
I appreciate FCC Chairman Tom Wheeler's desire to have a competitive wireless industry, but there is no other country that has four national facilities-based mobile operators that are all competing successfully and profitably. Some will argue that the U.S. is unique in that we have 320 million data-guzzling individuals. But what we need more than additional competition is more aggregate network capacity that doesn't cost the carriers tens of billions of dollars in up-front payments before buying more network gear. T-Mobile and Sprint both face massive investments in order to be competitive or differentiate their networks. As for AT&T and Verizon, I have noticed that the experience on both networks has gotten worse over the past two years rather than better, especially in major cities, as they struggle to keep up with data demand.
So, what industry structure would make sense in our rapidly evolving content and connectivity universe? Here are some thoughts:
Consolidated Wireless Industry. We need more aggregate capacity per wireless customer and cheaper wireless data services. Sprint or T-Mobile should be acquired or should merge. Not a new thought but the case has become stronger even in the past 12 months.
Resolution of DISH. I admire what Dish Chairman Charlie Ergen has done in amassing spectrum, but it is time to put it to work. Make a move with respect to Sprint or T-Mobile. Or, do something maverick and aggressive and get the wholesale thing right, creating a unique dynamic spectrum-on-demand marketplace that all operators and MVNOs such as Google could avail themselves of on an as-needed basis. This could get more capacity in subscribers' hands, and could result in more price competition in wireless.
Verizon should go bigger in broadband. Verizon should either get out of FiOS or should make a play for one of the cable companies – maybe even enter the Charter/TWC/Brighthouse fray. With a bigger broadband footprint, and more influence in that marketplace, Verizon could make some bold moves in its wireless business and more effectively leverage its content/OTT, and video distribution assets. I could say the same for AT&T, but they have DirecTV, so any further deal with a cableco is unlikely.
The FCC should provide incentives for more fiber deployment. When I look at 2020-2025, I see the average household needing 100 MB average speeds. I don't see our current broadband industry structure and technology getting us there. We are going to need a new wave of broadband investment, more competition, and lower prices.
More experiments with high-speed metro wireless networks. We are getting to a place where it is possible to envision a combination macro/small cell/Wi-Fi/broadband network in some of our more densely populated cities. This fixed wireless/pedestrian oriented network could lead to differentiated services, dynamic pricing and bandwidth usage, creating an ability to more effectively accommodate video over mobile.
- Hybrid fixed-mobile services. A corollary to the point above. With macro/small cell/Wi-Fi, we could see a narrowing of the delta between fixed and mobile broadband networks. One big appeal of this is would be the possibility of one overall broadband subscription, rather than separate fixed and mobile services. This could be especially appealing to urban apartment dwellers, price-sensitive users, and so on. That said, we should recognize that one size does not fit all in the U.S., due to our variable levels of population density.
The priorities for connectivity circa 2020: more capacity and a healthier competitive structure in wireless; faster speeds and a more robust competitive environment in broadband; and some exciting new business models combining fixed and mobile networks. We should be thinking about what industry structure, regulatory initiatives, and M&A activity will help make this happen.
Mark Lowenstein, a leading industry analyst, consultant, and commentator, is Managing Director of Mobile Ecosystem. Click here to subscribe to his free Lens on Wireless monthly newsletter, or follow him on Twitter at @marklowenstein.