Award Winning Blog

Monday, April 30, 2018

How Consumers Suffer from the Sprint-TMobile Merger

            In the upcoming weeks, Americans will see and hear millions of dollars in happy talk about the proposed merger of Sprint and TMobile.  Spin masters, dollar operated academics and a legion of lobbyists will claim breathlessly how this merger will make the combined company a stronger competitor and innovator, that consumers will see lower prices and how the combined company will expedite the introduction of fifth generation services.


            This merger has one and only one true objective: to generate higher margins for the combined company.  Sprint and TMobile have wanted to merge for years, because three ventures controlling nearly 100% of an essential, must have service, cannot help but earn higher profits than a less concentrated industry.

            This merger reduces by 25% the number of ventures providing service.  Would you want one of the Big Four airlines to merge with another, particularly after several earlier acquisitions?

            Do not for a millisecond buy the notion that the wireless marketplace will have more than 3 major players.  Already the pro-merger advocates mention that Comcast has become a competitor.  To be clear, Comcast has become a reseller of network capacity leased from Verizon.   There are several so-called Mobile Virtual Network Operators who can generate a profit as resellers thanks to the ample margins U.S. wireless carriers have. True competition results if and only if additional facilities-based network operators enter the market.

            Bear in mind that U.S. wireless carriers already have some of the highest profit margins (Average Revenue per User) in the world.  They have offered an enhanced value proposition largely because two mavericks, Sprint and TMobile, have come up with virtually all of the promotions and innovations we like.  But for competition from Sprint and TMobile, do you think AT&T or Verizon would offer lower roaming costs, carry forward minutes, large monthly baskets of minutes, semi-unlimited data, zero rating, bring your own device and service bundled with content?

            The pro-merger advocates will claim that there is no downside in having 3 powerful competitors.  In reality, having just 3 companies promotes a greater likelihood for what antitrust economists and lawyers term “conscious parallelism.” That’s a clinical sounding name for price fixing: it will become ever more enticing not to spend sleepless afternoons competing and instead to implicitly agree on prices and other, non-negotiable terms of service.

            If this horizontal deal goes down, expect the Big Three to increase their ARPU with AT&T and Verizon setting a higher umbrella price with the new company pricing service just below.

1 comment:

Kelly Cameron said...

Rob - very well said. And I was struck by your argument that only facilities-based competition will provide consumer benefits, because it reminded me of an argument from about 20 years ago. There were lots of companies back then relying on straight resale or access to unbundled network elements to compete with the ILECs. But the argument was made then, and largely accepted by policy makers, that only facilities-based competition was real competition. Of course, that argument was largely advanced by the RBOCs and, in my view (then and now) was advanced in order to increase the cost of competing in the local exchange market (it worked pretty well, but nowadays the local exchange market ain't what it used to be). To be clear, I'm not disagreeing with your point. I think MVNOs can be a useful source of some price and feature competition, but reducing the number of facilities-based competitors not only moves us closer to the local exchange market structure for wireless service, it also reduces (by 25%) the options for MVNOs to launch resale service and will likely end up raising prices for MVNOs as well.