As T-Mobile and Sprint revisit the idea of a merger, I look back at one of the classic papers that I read in business school, Bruce Henderson’s “The Rule of Three and Four,” and wonder aloud if Sprint is a victim of this business rule. In the paper, Bruce Henderson hypothesizes that a stable, competitive industry will never have more than three significant competitors and that the industry will find equilibrium when the market shares of the three competitors reach a ratio of 4:2:1.
Taking a closer look at the wireless businesses of the four major operators in the U.S., the market share in revenue terms at the end of 2017 was: Verizon (38%); AT&T (31%); T-Mobile (17%); and, Sprint (14%). In terms of profitability as measured in operating income before depreciation and amortization (OIBDA), the relative differentials were even greater: Verizon (44%); AT&T (32%); T-Mobile (12%); and Sprint (12%).
While it is highly debatable whether we can apply this hypothetical rule to the dynamic wireless industry in the U.S., I would argue that the general directionality of the “Rule of Three and Four” applies here. Further network investments in LTE-Advanced and 5G will require higher capital expenditure, and Sprint is certainly not in a good competitive standing to keep up the investment required. Outside of the top three, Sprint is attempting to improve its position through the consolidation with T-Mobile.
So, is the T-Mobile/Sprint merger a big deal in the path towards network convergence and consolidation? For the near term, the answer is “no,” especially considering that the deal will take a year to complete. In the longer term, this deal will make a serious investment in 5G more possible, possibly forcing Verizon and AT&T to invest more as well. Our 5G forecast will grow significantly when this deal closes and the FCC allocates some C-band spectrum.
As we look at the U.S. telecom and media connections share across the Fixed Broadband, PayTV/video, and Mobile markets, it has not changed that much from a year and a half ago. While there were a few percentage points taken from one competitor to the next in the facilities-based Fixed Broadband and Mobile markets, the most significant change continues to happen in the Video space.
The OTT players, e.g., Netflix, Amazon, and Hulu, continue to take a greater share of American households and individuals. While it is not fair to equate the same value of a Netflix customer relationship to a PayTV subscriber account at Comcast, the growing OTT share is perhaps a good reflection or outcome of expanding network capacity of broadband networks.
If the T-Mobile/Sprint merger kicks off major investments in 5G, perhaps we will see more fragmentation and growing competition among both facilities-based mobile and fixed broadband players and OTT players such as Netflix, Amazon, Apple, and others. Five years from now, the landscape could look very different, with major investment in 5G and parallel investment in Edge Computing.
Kyung Mun is a senior analyst at Mobile Experts LLC. Mobile Experts is a network of market and technology experts that provides market analysis on the mobile infrastructure and mobile handset markets. Over the course of his 20+ years in wireless and cable industries in a dynamic range of roles from engineering to product management and technology strategy, Mun has contributed to the advancement of mobile communication while working at leading companies in the mobile value chain including Motorola, Texas Instruments, Alcatel-Lucent and a few startups in between. He holds undergraduate and graduate degrees in electrical engineering from the University of Texas at Austin and Georgia Tech, and studied finance and strategy at Southern Methodist University.