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.
Nonsense!
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.
