About a year ago, I wrote a piece about the “Rule of Three and Four”, a business theory that hypothesizes that a competitive industry finds an equilibrium when the market shares of three competitors reach a ratio of 4:2:1. I wrote the article in the context of the T-Mobile and Sprint merger announcement over a year ago to put a theoretical framework around it, and to explain competitive industry dynamics that drove the seemingly inevitable fate for Sprint.
A year later, I am humbled by a complex web of political and economic realities that make our forecasting difficult. I realize that the market isn’t always rational, and one can apply business theories to a certain extent, especially for a heavily regulated industry like telecom. In light of recent press around the U.S. Department of Justice’s desire to push for four facilities-based mobile carriers, it appears that the easily explainable business theory needs to be revised to the “Rule of Four.” Based on regulatory postures here and abroad, it looks like the industry modus operandi is having four facilities-based mobile operators.
The “Rule of Four” can be found in other developed markets as well. The Japanese regulator has incentivized Rakuten, a mobile virtual network operator, to build its own network by granting 5G spectrum licenses to more effectively compete against the three incumbent operators: NTT, KDDI, and Softbank. While the fate of Rakuten’s mobile business is too early to call, it has been innovative in bringing new network design approaches like fully virtualized RAN to the marketplace.
The latest incarnation of the Rule of Four is exemplified in the Chinese regulator’s issuance of 5G spectrum licenses to the three incumbent telecom carriers including China Mobile, China Unicom, and China Telecom, and a fourth new entrant, China Broadcast Network, a state-owned cable operator. The Ministry of Industry and Information Technology (MIIT) announcement is seen as a form of Chinese government’s fiscal policy to expand the domestic market opportunity for Huawei, ZTE, and other domestic electronics suppliers amid the international trade tensions around the 5G supply chain.
While it seems reasonable to expect the four-player market to be possibly sustainable in high-ARPU markets like those in the USA and Japan, I am not certain about low-ARPU markets where operators are pressured to keep up heavy capital expenditures that characterize the mobile industry. The telecom industry is capital-intensive, and the name of the game is scale. While it is reasonable to expect all players to be able to find meaningful success in the early days of 5G, each will have to conquer new business opportunities in both consumer and business segments for the long term. Long-term success will ultimately depend on how quickly and big they can get and how much profit expectation that they are willing to live with. The efficient utilization of 5G and Edge Computing infrastructure resources will certainly impact the cost side of their businesses.
While the magic number appears to be four today, we ultimately feel that three is the right number in an industry where continuous heavy capital investments are needed. However, the government regulators control this market through spectrum licenses and consumer protection, so we may be stuck with four for a while. That’s good news for the telecom infrastructure suppliers. Let’s keep on building!
Kyung Mun is a senior analyst at Mobile Experts LLC, 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 the wireless and cable industries in a dynamic range of roles from engineer to product manager and technology strategist, 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.
"Industry Voices" are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by FierceWireless staff. They do not represent the opinions of FierceWireless.