How to tell whether the wireless market is competitive enough

The recent comments of Sprint Chairman Masayoshi Son (Japan’s richest man) about America’s mobile market have called into question the conventional wisdom of competition. Son has managed to irk almost everyone with a series of contradictory comments in an apparent bid to win regulatory approval for the takeover of T-Mobile.

People who believe that AT&T and Verizon are too powerful and need to be challenged by a third powerhouse support the T-Mobile acquisition.

Others are opposed to any kind of consolidation, regardless of the benefits. They believe that a reduction in the number of carriers will somehow hurt competition. So no on T-Mo.

Son also made a number of false statements about the competition and quality of America’s mobile networks and suggested that if he can buy T-Mobile, he will change things.

I don’t buy any of the arguments, and here’s why.  Competition in today’s highly advanced and complex wireless market comes from the level of technology, not the number of competitors.  Indeed, the number of wireless carriers could go down to two, and the market could still be competitive.  What drives competition in the industry is the service development on top of the the network, largely the domain of third parties and the interplay of many other related markets:  operating systems, handsets, mobile standards and so on.

Mr. Son knows this better than anyone else, and he’s been saying so for years. He even set up his command central in Silicon Valley to be near Google and Apple, the companies he pronounced at Mobile World Congress in 2011 that “take all the upside and turn mobile operators into dumb pipes…the mobile industry has lost 40% of its average revenue per user in the last decade.”

As for the argument that Sprint needs to buy T-Mobile in order to compete with AT&T and Verizon, that’s not exactly true. Sprint has a sizable spectrum footprint and doesn’t necessarily need T-Mobile’s map.  It’s not the fault of AT&T and Verizon that Sprint has been plagued by bad technology decisions and poor management.  Indeed there’s a common trope from the 3rd or 4th player who complains that there is enough competition because it is trying to compensate in sympathy for what it lacks in business acumen.

T-Mobile, to its credit, has done a number of guerrilla tactics to win market share, so it doesn’t necessarily need Sprint.  What Son doesn’t say, but what is true, is that by purchasing another carrier, the number of subscribers can increase, so the overall costs of delivering services can be reduced to the two entities (billing, customer service etc). Additionally, sales and marketing, some 25% of operating costs, can be reduced with acquisitions.  However those gains can take at least a year or more to be realized.  Merger approval and the ensuing transition can be painfully slow. A year is an eternity in the mobile world.

Meanwhile other technological developments are happening which support competition in the marketplace, namely the rollout of nomadic wifi. A wild card could be Facebook launching an MVNO. Read my research note.

So, in summary, I don’t support or oppose a merger. I just say the government should not pick the winners.  Policy makers, however, can play a role in two important ways:

1.  Reduce the local barriers to wireless infrastructure deployment.  Carriers can be forced to pay up to rate times the market rate to rent locations for mobile masts and towers.  The government can standardize the rules about roll out to help lower the costs and speed the development of mobile infrastructure.  This is essential for serving rural areas.  Read more in Strand Consult’s report

2. Accelerate the freeing of spectrum from the federal government.  This could double the amount of spectrum and may more than anything else improve the economics of wireless provision. President Obama has set a goal to do this within 10 years.  We should make it happen even sooner.

Mr. Son deserves credit for his success in Japan (he turned the most the least profitable mobile operator in Japan into its most profitable), but in his attempt to win favor in the US, he makes a number of incorrect assertions. It’s great to have investment from Softbank, but Son needs to tell the truth, not make up scare scenarios to win the favor of regulators.

Here is my oped on the topic from Re/code. Forget the Broadband Bogeyman.

Here are some other perspectives

Jeff Eisenach in RealClearMarkets A better case for the Sprint T-Mobile Merger

Larry Downes in Forbes. Softbank CEO wants US to follow Japan’s lead. Um, no thanks

Richard Bennett in High Tech Forum. What is Masa Son talking about? 

Bret Swanson in Forbes Mr. Son comes to Washington with big vision but few facts.