Earlier this week, the two-year-long saga of the T-Mobile-Sprint merger finally came to conclusion (Yes, some hurdles remain but it is unlikely there are any more meaningful bumps left.)
The consummation of the two major U.S. operators was a decade in the making, and to the students of the “Rule of 3” it was no surprise. The two players tried to get together in 2011, but AT&T swooped in for T-Mobile in what ended up a failed attempt to woo the regulators.
The industry has gone through a remarkable transformation over the last decade. The market definition of the industry itself has changed. However, over this time period, we kept coming back to one critical question: How do market forces shape the number of operators in a given country?
In our paper “Competition and the Evolution of Mobile Markets: A Survey of Competition in Global Mobile Markets” in 2011, we explored how the mobile operators segment has evolved over the last few decades, and studied the dynamics through the lens of “Rule of Three.” The theory states that in any mature industry in a given country, three top players dominate the market. Said another way, a market typically settles down to three major players after the market has worked out its inefficiencies. The paper became a reference for many regulators and agencies around the world who were looking to understand relative competitive dynamics of their own mobile market.
Given the convergence and shift in the revenue stack, the mobile market has changed drastically as predicted initially by our 4th wave thesis paper in 2012.
In the case of mobile operators in a given country, the Rule of 3 is followed with remarkable consistency. Of the 40 major markets we studied in 2011, on average the top three mobile operators controlled 93% of their respective markets. In fact, 36 of the 40 markets had the top three players control 85% or more of the market.
Other hypercompetitive markets like the U.K. and the U.S., which had more than four to five large players, are moving toward the consolidation phase wherein the top 3 control more than 80% of the market. Of all the large major markets, only India proves to be an exception, and it is due to the hyper-growth phase of the market and due to somewhat unique nature of the market. The power of “Rule of 3” was affirmed by our subsequent study on the topic, “Competition: How Many Operators Does A Country Need?”
To really understand the power of “Rule of 3” market forces, just look at the Indian market which was the most competitive market in the world with six to seven mobile operators with more than 10% market share. The market kind of collapsed under its own competitive weight (obviously also instigated by Jio) to the point that there are only 3 main competitors in the market right now – Airtel, Jio, and Vodafone-Idea. In every market, the top 3 operators have generally controlled more than approximately 80% of the market during the previous 11 years. The U.S. market has also gradually consolidated over the period spanning more than three decades.
Compared to 2011, of all the major markets we studied, only France increased the number of operators in the country (from 3 to 4 with the introduction of Free). Otherwise, all other markets either saw a decline in the number of the operators or the number of operators stayed the same. The average number of operators in these markets dropped from an average of 3.73 to 3.3.
Overall the “Rule of Three” has held steady in global markets over the last decade. The concentrations have changed, market players have moved around, companies have been acquired, some exited the business, but the basic framework of three operators for a given market has been true. The competitive intensity in the Indian market drastically altered the market in a matter of 12 months. The overall market whittled down to just three major operators. Over time, Mexico replaced China as the least competitive leading the Mexican regulator to invite AT&T and also launch a wholesale nationwide network to boost competition and reduce the monopoly of America Movil.
In the end, the management of a market lies with the regulator and the policy maker. They must always strive to be ahead of the curve, or else they risk market failure that will be too hard recover from. You regulate what you measure. Our view of the market is that it can no longer be viewed through the lens that was defined decades ago. As discussed in, “Competition: Rethinking the Regulator Framework for the Connected Intelligence era,” the wireless market is different in its outlook from every angle so trying to regulate it like a pure access market is a mistake, and the market is prone to a failure.
Competition on the access layer can no longer be seen through the lens of just the traditional metrics or competitive index tools when the market has fundamentally changed. However, access forms the bedrock of the industrial and consumer growth we will see for the next few decades, so it is extremely important for any regulator or agency to ensure that the layer continues to be the innovation layer wherein the participants are transparent and are behaving according to the norms of a free market. Any diversion from these basic principles will indeed harm the market.
The “Rule of Three” has stood the test of time. Each large ecosystem generally gravitates toward the three players which can provide a healthy dose of innovation, investment, and competition. In the mobile operator segment, the basic elements of the thesis still hold true since we last evaluated the global markets using this lens. Activities in markets around the world suggest that if the market share of the top three operators are held in the right proportions, they help to optimize the competition in terms of price and innovation.
The transition from four to three operators will have ripple effects in the U.S. market that will be felt for the better part of this decade. However, as we look forward to the next 10 years, we must ponder as to how will the Rule of 3 shape the competitive forces, the market conditions, and the trajectory of the Connected Intelligence Era.
Chetan Sharma is CEO of Chetan Sharma Consulting, an 18-year young management consulting firm and is an advisor to CXOs and boards of companies in the wireless industry. Over his 25 years in the industry, he has worked with operators on all five continents and has the rare distinction of advising management teams for each of the top 9 global mobile operators. Chetan has written 15 books on various wireless topics and his research work has helped shape many strategic decisions and dialogue in the industry. He is curator of industry’s premier brainstorming summit Mobile Future Forward. More information at www.chetansharma.com. You can follow his musings at @chetansharma
"Industry Voices" are opinion columns written by outside contributors--often industry experts or analysts--who are invited to the conversation by Fierce staff. They do not represent the opinions of Fierce.