Earlier this week, the Wall Street Journal reported that the U.K. regulator, Ofcom, is opposing the proposed merger between Three and O2. In France, regulators have put obstacles in front of a proposed merger between state-controlled Orange and Bouygues. In both of these countries, these deals would have reduced the number of facilities-based wireless competitors from four to three. This recalls successful efforts to block similar consolidation in the U.S. (AT&T/T-Mobile and then Sprint/T-Mobile).
Regulators want a healthy level of competition in the wireless business. But at a certain point, this is not working out economically. There is no country where there are four healthy national facilities-based wireless operators. Let’s look at the U.S. market. We’ve seen vigorous competition over the past three years, with data prices that have fallen by 30-40%. Yet Sprint continues to struggle and most financial analysts are very cautious on the prospects for the company. Their network has improved to the extent it is “in the ballpark” competitively. But Sprint is behind where we all thought they would be in leveraging their most significant competitive asset: their 120 MHz of 2.5 GHz spectrum. As they sit on this treasure trove of ‘real estate’ (DISH continues to hoard its spectrum as well), AT&T, Verizon, and T-Mobile are preparing to spend upwards of $30 billion in the 600 MHz auctions in order to contend with continually growing demand for data capacity and the desire to offer greater speed. Facebook’s introduction of its Live video hub at F8 this week has probably sent an additional chill down the spines of operator CTOs.
Meanwhile, on the broadband side, it was front page news in the Boston Globe and the tech press that Verizon will be bringing FiOS to the city of Boston. So, consumers and businesses in the #2 tech epicenter in the world, after Silicon Valley, will have a choice of two – two!! – broadband competitors once FiOS is launched. And still, according to the FCC, some 45% of Americans do not have a choice of more than one broadband provider (defined as offering a minimum 25 Mbps download service). Broadband prices in the U.S. remain high, especially compared to much of western Europe and Asia, where there is more competition and rules in some countries requiring facilities-based providers to open up their networks for resale.
There is something seriously wrong, and lopsided, about this picture. And even with all the growth projected in wireless, with the ‘billions of connected things’ and so on, I think it will be very difficult for any country to support more than three viable facilities-based competitors. Just look at the spending picture ahead. First, it seems de rigueur now in most developed economies that operators have to pay a lot of money for spectrum. And much of the next wave of network investing will be on deploying outdoor and indoor small cells, to both provide more surgical levels of coverage and to increase capacity. It is expensive to deploy small cells. It is also a challenge to deploy them in large numbers because of siting issues and backhaul. Having 4-5 operators each trying to deploy a network increasingly dependent on smaller cells just does not compute. And how will this work indoors? On top of this is the billions of dollars required to deploy some flavor of 5G over the next ten years.
The other factor in all this is that macro cellular, small cells, and Wi-Fi are coming together, over time. With LTE-U (and the standards-based LAA), services will work more harmoniously between licensed and unlicensed spectrum. There are some examples of operators being successful with hybrid fixed and mobile networks, leveraging Wi-Fi hotspots, in some of the more densely populated cities in Europe.
Add to this mix some leading edge work being undertaken by Starry, Facebook’s Terragraph, Google, the incumbent wireless operators as part of the 5G roadmap, and others, to leverage higher frequency spectrum. I believe we could see some new broadband providers, especially in cities, over the next five years, with less of a boundary/distinction between fixed and mobile.
Rather than relying on an older-guard framework, it would be a more effective exercise to think about a 2020 construct, where the breadth of licensed and unlicensed spectrum is more effectively and efficiently utilized and shared, and where the resources of fixed and mobile networks are leveraged. With all of these possibilities, we should be less fearful of consolidation than perhaps we were a couple of years ago.