What is a sustainable, stable market share structure for the U.S. mobile business that provides enough competition to yield customer benefits, and also provides enough profit margin that the mobile service providers can afford to invest in their businesses?
For decades, some have argued that four national retail providers is too many. Just as many might argue that an AT&T-Verizon duopoly would not provide enough competition. And yet others might argue there is potential for competition even under conditions of duopoly.
Economists differ on the effects of duopolies on the market. According to the Cournot model, duopolies lower prices, although they not so much as markets with perfect competition, a condition marked by market circumstances in which no one participant dominates.
The Bertrand model of competition, on the other hand, predicts that duopolies will eventually lower prices as much as perfect competition would. Like most theoretical models of economic forces, both the Cournot and the Bertrand models can be persuasive, but neither is viewed as definitive.
Nobody believes the mobile business ever will be as competitive as retail apparel, for example. But few probably believe a duopoly or monopoly is a good idea, either. The issue is what market structure might yield the greatest amount of competition. Some might call that a contestable market.
And though economic analysis normally assumes that it is the interests of buyers that matter, the interests of providers also matter. If a provider cannot stay in business, it cannot provide competition. So the structure of markets, in particular the market’s ability to sustain multiple players over time, does matter.
In fact, some might argue that if a greater degree of market share could be garnered by T-Mobile USA and Sprint, that would be a pro-competitive move. In fact, a reasonable assumption is that market analysis ranges between an “optimal” practical market structure ranging between two to three leading companies, and not much more.
Most observers no longer believe, as once was the prevailing view, that telecommunications is a natural monopoly. But observers with long memories will tend to be uncomfortable with a stable duopoly.
The big change between the former mobile duopoly and the current market is the availability of wholesale access, the role of over the top applications and the new role of untethered data access. All of those developments arguably weaken the amount of market power any duopolist could manage.
Economic models are all about the assumptions, and that applies to analyses of what should happen as additional spectrum is made available to U.S. wireless providers. In the past, large blocks of new spectrum have allowed new competitors to enter the mobile market. One assumes that would be among the key policy issues as U.S. regulators look to auction new blocks of former broadcast spectrum.
The problem, as with virtually everything in the global mobile business or the global fixed network business, is the business terrain between monopoly on one hand and multiplicity on the other. In the mobile segment, the issue is how many leading providers are required to sustain both innovation and supplier health.
Most policymakers globally have concluded that monopoly is, in fact, a poor way to encourage innovation, efficiency and lower prices.
On the other hand, a simple spreadsheet exercise will be enough to convince anyone that the mobile or fixed network communications business, when conducted in a facilities based way, simply cannot support lots of contestants.
Whatever you might suppose total demand is, when multiple providers start to divide up that demand, markets can become ruinous, meaning no contestant gets enough market share and revenue to sustain itself.
The Phoenix Center for Advanced Legal & Economic Public Policy Studies long has argued that the sustainable number of network-based contestants in either the wireless or fixed network business will be limited to just a few firms, for this reason.
Phoenix Center Chief Economist George Ford now argues that consumers actually would be better off if any future wireless spectrum auctions allow all wireless providers to bid, rather than trying to ensure that spectrum assets are allocated more broadly. In other words, “set asides” to promote more competition would actually be counter productive, long term.
This might seem counter-intuitive. If competition is better than a monopoly, shouldn’t broader spectrum awards create more competition, and therefore lead to more innovation and lower retail prices?
That’s the argument the Phoenix Center takes on in a study. There are two key assumptions.
“First, we assume that price falls as the number of competitors increases (e.g., the Hirschman Herfindahl Index or “HHI” falls),” says Ford. “More formally, we assume Cournot Competition in Quantities.”
In other words, the Phoenix Center uses the same framework as the the Federal Communications Commission and the Department of Justice, where it comes to assessing market concentration and the impact of competition on retail prices.
A second key assumption is important, though. The Phoenix Center does not assume the amount of capacity from spectrum is not linearly related to the amount of spectrum a firm has.
That is, if we double the amount of spectrum, then the capacity provided to a firm from that additional spectrum more than doubles. That might be a head turner, at first. After all, are we not dealing here with laws of physics?
My apologies to Dr. Ford if I misapply the assumption, but here’s how I’d explain it.
Yes, laws of physics do apply. But wireless networks routinely “re-use” spectrum. A single physical allotment can be used repeatedly across a network, with a primary determinant being the coverage size of each cell. Lots of smaller cells can use a single amount of frequency more efficiently than a few big cells.
But cutting the cell radius by 50 percent quadruples the number of required cells. And since each cell represents more capital investment, you see the issue. Spectrum does not linearly relate to effective end user bandwidth. The amount of actual bandwidth a network can provide is related to the amount of spectrum re-use.
“Richer” providers can better afford to create the denser smaller cell networks, so can provide more bandwidth from a fixed amount of spectrum.
Wireless Competition Under Spectrum Exhaust provides the detailed model, but the point is that a smaller number of new spectrum recipients creates more effective end user bandwidth than a larger number of new recipients. That seems counter to reason, and the analysis is important for suggesting the “common sense” understanding is wrong.
Spectrum allocation also is related to the larger question of what market structure is optimal, in the sense of balancing maximum innovation and consumer welfare with long-term health of the suppliers.
In the U.S. market, we have not yet reached a practical conclusion about the ultimate shape of the the future U.S. mobile market.
by Gary Kim
Gary Kim is an active industry writer and analyst, editor of Mobile Marketing & Technology, Content Marketing News and Carrier Evolution. He is a frequent contributor to IP Carrier and TMCnet, and a good friend of Razorsight. Keep up with all his industry insight — follow him on Twitter @garykim.