Our recent analyst blog titled “Why the Merger of T-Mobile and Sprint Will Succeed This Time”, outlined reasons that help lead to the conclusion that the FCC and DOJ are likely to allow the merger. Since the merger was announced, executives of both companies have visited with the FCC and other regulators to lay out why the merger should be approved. There has been much speculation in the media that generally follows the traditional lines of reasoning: The regulators will consider the merger based on the primary market definition as being the mainstream mobile service market that consumers are most familiar.
Because the mainstream mobile sector is dominated by Verizon, with 35.5% and AT&T with 33.4% share of the market as measured by the number of wireless service subscriptions. The application of the HHI, Herfindahl-Hirschman Index, to just the two dominant US Mobile Network Operators (MNOs), yields a result that ranks the mobile market as being close to the highly concentrated threshold. When the squares for market shares of T-Mobile and Sprint are added, that pushes the index over the threshold for the mainstream market being considered highly concentrated. If that determination is taken as the primary determinant by the DOJ and FCC, then the merger might be rejected during the preliminary review and would not proceed to a full review by the DOJ or FCC.
However, the HHI serves as a ‘tool in the toolbox’ that is used to answer the fundamental question of whether the merger would lead to less, the same or a higher level of competition. That determination is made more complex by the rapidly changing competitive market landscape and the possibility that the merger will enhance rather than impede competitive forces within the mobile and the broader ICT, Internet and Communication Technologies, space. Here we look at a few of the factors that we think are likely to be considered.
The Conventional Determination and Remedies
As mentioned, the concentration of the mainstream mobile service market is so dominated by the top two companies, Verizon and AT&T, that their marketshare numbers alone, when plugged into the formula, lead to the determination that the mobile market is on the borderline of being considered highly concentrated already. This is how that looks:
Explanation: “The term “HHI” means the Herfindahl–Hirschman Index, a commonly accepted measure of market concentration. The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. ”
When applied to the mainstream mobile market for Verizon and AT&T respectively:
(35.5×35.5) + (33.4×33.4) = 2,376
Since the guideline interpretation of DOJ is:
The agencies generally consider markets in which the HHI is
- Under 1500 = low level of concentration
- The regulatory agencies normally allow mergers that will result in lower than 1500
- Between 1500 and 2500 = moderate level of concentration
- The agencies more closely consider the impact of additional mergers and the implications for broader market impacts, such as the impact on innovation, investment and enablement of core inputs into the impacted market.
- Over 2500 = highly concentrated
- The merger between T-Mobile and Sprint would push the HHI from 2376 to 2827. with the addition of 17.1×171. + 13.4×13.4
- The HHI can reach 10,000 for one company holding the entire marketshare. This seldom if ever happens as markets usually have alternative products and services. The exceptions are exampled in specific geographic markets, such as for power or water utilities, or in markets such as pharmaceuticals in which a unique product is offered under the grant of patent protection of the market monopoly. Very highly monopolized markets are often government owned or controlled. Examples of government ownership and control include the majority of roadways and the regulation of railways.
Unique Factors Come Into Play
The wireless industry in the US and most of the world has been developed as a ‘State Sanctioned Monopoly’ over the essential resource of spectrum. This has occurred under the administration of various forms of government including the formerly strict Communist countries including China. The world has broadly adopted the role of free enterprise of what most countries consider a national resource, the airwaves, so that the private sector would invest the hundreds of billions of dollars that have been needed to develop network and device technologies and build the nationwide coverage of increasingly capable networks. However, the grant of a monopoly over the ‘core input’ of spectrum in the mobile service business model leads to an accentuated concern over the impact of market concentration. As the industry has grown, the capital requirements and control over marketshare and scale efficiencies have grown with it. When combined with the inherent monopoly that licensing of most of the viable wireless spectra provides, the concerns over high concentration are increased. The analogy was the degree of monopolization that took place in American in the railroad, steel and oil industries:
On the one hand, the mobile industry has become highly saturated and delivers a ‘broadband experience’ to the majority of subscribers through the use of 3G-4G networks and devices. The threshold for being considered highly concentrated based on the HHI has already been crossed prior to a merger between T-Mobile and Sprint.
On the other hand, the US and world have witnessed the evolution of wireless as a catalyst for convergence of markets that enhances competition beyond its own domain. The sphere of influence and rapid changes have spurred an increase in national wealth as many prior Internet and bricks and motor businesses adopted mobile communications to enhance their markets. The has led regulatory agencies, scholars and legal authorities in Europe, Asia, the USA and most everywhere else to consider the impact of the Mavericks in the impacted markets as being essential to the formation of a competitive environment.
In recent years, the state of US telecommunications marketplace as reported by the FCC:
“Conclusion: …Focusing only on competition in the provision of mobile wireless services, rather than attempting to examine the broader mobile wireless ecosystem, our assessment of various generally accepted metrics of competition in this Twentieth Report indicates that there is effective competition in the marketplace for mobile wireless services…”
The most recent reports have shown an increased level of competition as observed in factors including average prices, degree of coverage of rural areas, and other measures.
The FCC has also taken note of the entry of cable companies into the wireless arena. “in 2016, both Comcast and Charter Communications, the nation’s two largest cable providers, activated MVNO options they held with Verizon Wireless. Comcast launched its wireless service in the spring of 2017 as Xfinity Mobile, and Charter anticipates offering its service in 2018.”
During the past year since that report was published, Comcast has gained considerable early market momentum and Charter has entered the market as mentioned in our recent article. In addition, Sprint has entered joint network development and sharing agreements with Cox and Altair. These efforts have yet to report measurable stand-alone results. However, they may serve and a further template for consideration of participation by the cable industry as the cable and wireless markets converge upon a common or much overlapped set of service offerings. In place of speculation, which the DOJ in particular is known to avoid, has entered what the FCC has acknowledged as an element of increased competition.
This only scratches the surface on the issue of the expansion of the conventional wireless to additional include additional market players.
Statista, 4th quarter, 2017
Note: The DOJ is expected to take the primary role in the determination of the competitive impact of the merger due to their past role in telecommunications and media sector mergers. The FCC will take the lead role in the full review process if the merger moved forward past the preliminary review stage.
US Department of Justice website https://www.justice.gov/atr/herfindahl-hirschman-index
US FCC, “Annual Report and Analysis of Competitive Market
Conditions With Respect to Mobile Wireless” FCC, September 27, 2017