Mobile consolidation – a threat to competition

Market disruptions

The global financial crisis and the very rapid growth in mobile broadband, thanks to smartphones, have combined to create havoc in the mobile market.

On the one hand, we see that customers, especially those in countries seriously affected by the GFC, such as Southern Europe and Ireland, have reduced their mobile use, with the result that there has been a significant drop in ARPU. On the other hand, phenomenal growth has taken place in mobile broadband, but without a significant increase in ARPU.

This is causing concern among the mobile operators. Unlike the fixed market, the mobile market is, in general, competitive – with some good products and prices arriving in the market. This, in turn, has driven demand for mobile broadband. However it is important to realise that this growth has as much to do with affordability as it has to do with the technical innovations in and around smartphones.

Operators have lost their all-powerful position

Most mobile operators were taken by surprise by the effect of the smartphone (in particular Apple’s enormous success with its iPhone). They have lost leadership in the mobile market and will now at least have to share their powerful position with others, such as Apple and Google (Android). Unlike the previous generations of mobile vendors – such as Nokia, Ericsson and Sony, who made deals with the operators on their (the operators’) terms – the new players are not intimidated by the mobile operators; they are happy to take them on.

Consolidation in order to regain lost power

With costs rising as a result of the need to upgrade their networks, and in the absence of the fat margins they have previously enjoyed, the operators are searching for new ways to advance their position and regain dominance in the market – in the past they were able to dictate the market. The new strategy aimed at returning to this position is consolidation – limiting the number of competitors so as to regain the power to dictate prices.

The most blatant attempt at this is taking place in the USA, where AT&T wants to take out T-Mobile, a major competitor that has become a victim of AT&T’s belated realisation that it had missed the mobile broadband boat. This would reduce the number of competitors to three and would most certainly produce an increase in mobile prices. Verizon, its other main competitor, is not objecting, since it will also profit from this reduction in competition.

If the FCC allows this to happen it will be additional evidence of its inability to show leadership on issues such as competition and innovation (see also USA – Travelogue – Will the USA be able to catch up in the broadband world – May 2011).

Struggling operators will also lead to reduced competition

Vodafone, a 45% shareholder in Verizon, would also be happy with this, for exactly the same reason. Globally its margins have been squeezed due to the abovementioned developments – plus it will also profit by further consolidation elsewhere –in Europe for example.

Any struggling mobile operator is now on the take-over list and regulators will need to be extremely careful that this does not lead to a reduction in competition – regulators are in a difficult position, as the long-term future of the struggling operators will eventually also lead to a reduction in competition.

On the road to structural regulation?

The situation, therefore, is beginning to look as though (as BuddeComm has been predicting for several years) the structural separation of mobile networks will become an issue, to control the negative effects of the monopolistic trends in the market. Customers will get support from politicians. If mobile charges are increased there will no doubt be a consumer backlash, which will lead to protest. Mobile is no longer a luxury item – it is becoming an essential tool, a utility. If the mobile operators will not respond to consumer demand for affordability, politicians will start asking for regulatory intervention.

This is not an inevitability. Mobile operators could, in theory, listen to their customers. However history tells us that this is not the telecom operators’ strong suit, in which case regulatory intervention will be a consequence.

Regulators in a catch-22 situation

Regulating the mobile market has been notoriously difficult for the regulators. It has taken almost a decade for some small changes to take place around the termination and roaming rorts that the mobile operators have been able to establish between themselves – without a doubt the most profitable part of their operations by far, and the most expensive service for customers, who have very little control over it. As all the mobile operators collaborate in these sharp practices – which they have made extremely complex – there are also very few, or no, alternatives available to customers.

So regulating an increasingly concentrated mobile market will most certainly not be an easy thing to do, and this could mean that it may well be another decade before the situation is brought under control. Therefore it would be far better to prevent it, and to ensure that the current level of competition will be maintained. However, under the circumstances mentioned above I am afraid the latter is beginning to look like a rather theoretical observation.

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