By warding off a merger that would cut the number of wireless providers to three from four, U.S. regulators are betting carriers will keep prices low while still investing enough to offer robust mobile-phone service.
That strategy may backfire.
In France and Brazil, each with four large mobile-phone providers, price wars have resulted in underinvestment in networks and slower data speeds for customers. The French government is urging companies to merge, while in Brazil, regulators are pushing for more spending to improve coverage.
“Not everybody has enough resources to keep investing,” said Chetan Sharma, an independent wireless analyst. “Because of that, anyone below No. 3 falls to consolidation.”
The U.S. Federal Communications Commission has repeatedly argued that the market needs four competitors, fending off AT&T Inc.’s attempt to purchase T-Mobile US Inc. (TMUS) in 2011 and sending strong signals to Sprint Corp. (S) to back off from a merger bid for the same company this year.
“Four national wireless providers is good for American consumers,” FCC Chairman Tom Wheeler said in a statement last week. An agency press official declined to comment.
Wheeler can point to Canada, where regulators are pushing to add a fourth national provider to ignite more competition. Still, with the U.S. market close to saturation, carriers are turning to price cuts to lure users, putting pressure on profit margins and making it harder to spend on network upgrades. That could eventually force Sprint and T-Mobile into each other’s arms down the road.
In France, consumers have witnessed the connection between large price cuts and underwhelming coverage. Iliad SA (ILD), run by French billionaire Xavier Niel, used its position as the fourth-largest competitor in the country to go on a price-cutting rampage that brought the rest of the industry to its knees -- great for consumers, who have seen their phone bills drop by 40 percent since the company entered the market.
Yet French 4G networks have lagged the U.S. and Asia in coverage -- bad for consumers who want faster Internet speeds, and bad for regulators seeking to encourage the adoption of new technology. Iliad is now seeking a takeover of T-Mobile, threatening to bring its aggressive price campaign to the U.S.
“If you think Iliad would have a positive impact on the market in the United States as a user, I suggest you get on a plane and try using your phone in France,” Walt Piecyk, an analyst at BTIG LLC, said in a note earlier this month. “Our tests of wireless networks in Paris a few weeks ago when we visited these operators resulted in slow speeds and coverage that quickly dropped off 10 to 20 feet inside buildings.”
French officials agree that coverage needs to improve. Economy Minister Arnaud Montebourg started calling this year for the country’s mobile-phone companies to merge and has pushed Orange SA (ORA) -- France’s largest carrier, owned about 30 percent by the state -- to facilitate consolidation between its rivals. Orange is considering the sale of its mobile-phone towers in neighboring Spain as it struggles with falling revenue, a person with knowledge of the plan said today.
Montebourg wasn’t always such an advocate for a three-competitor market. In January 2012, as Iliad introduced Free Mobile with a phone package starting at 2 euros ($2.67) a month, Montebourg applauded. He tweeted, “With his new phone package, Xavier Niel just did more for French consumers’ purchasing power than Nicolas Sarkozy had done in five years,” referring to the former president.
Almost two years later, Montebourg’s tone was much different when Iliad began including 4G wireless data in the 2-euro package. “Always more job cuts in telecoms because of Free Mobile’s low-cost excess,” he said.
Now that Sprint has backed off from a plan to merge with T-Mobile, Iliad remains the only contender to have made an offer for the fourth-largest U.S. carrier, though its proposal was rebuffed. Dish Network Corp. (DISH) has also said it may be interested in T-Mobile. In either case, the acquirer would still confront the same challenges T-Mobile faces alone.
T-Mobile has advocated a market with three strong players for years, Chief Financial Officer Braxton Carter said.
“Given the capital intensity, given what people need to do with the networks, and given a duopoly structure here in the U.S. marketplace, the formation of a third scale national carrier actually would increase competition,” Carter said yesterday at an investor conference in Boston. “The government certainly has taken a different view.”
Like the U.S., Brazil has remained staunch in its defense of a four-competitor market. The government has said it prefers the current situation even though its smallest phone company, Oi SA (OIBR4), is buried in so much debt that its participation in an auction of prized wireless spectrum is in serious jeopardy.
Brazilian regulators have steadfastly refused to endorse the idea of mergers to help the carriers strengthen their positions, instead floating the idea of state-backed financing to fund network investments. At the same time, they’ve been pushing carriers to extend coverage in the nation’s vast rural areas, squeezing them for capital spending even as prices fall. Oi’s average monthly mobile bill dropped 11 percent last quarter from a year earlier, with government-mandated fee cuts hurting results.
Regulators around the world want to avoid the fate of Canada, where the government has been floundering for more than six years to bring in a strong fourth national competitor.
Canada has reserved spectrum just for new entrants in an auction set for early next year and is reviewing domestic roaming rates in the next few months in its latest attempt to try to entice someone to take on the established competitors.
Part of the challenge is that in most major economies, mobile-phone use is already so prevalent that there’s little incentive for a new competitor to enter the market. In Canada, about eight in 10 people already have a wireless device, according to a report from Bank of America Corp.’s Merrill Lynch Global Research. A new or even a regional company would have to buy airwaves, build its network, compete on price and persuade consumers to try an unfamiliar brand to compete nationally. Not an easy task.
“Canada is so against the grain of the rest of the world that they’re pursuing a regulatory policy that Europeans pursued 20 years ago and have deemed to be a failure,” said Dvai Ghose, an analyst at Canaccord Genuity Group Inc. in Toronto.
While the U.S. has fended off a reduction to a three-carrier market for now, it’s probably just delaying the inevitable. Sprint and T-Mobile’s parent companies have made clear they still expect mergers in the nation’s wireless industry in the future.
“My thesis is it will still happen. The timing is uncertain, because the regulatory view is, ‘Four is good enough, and T-Mobile has performed well,’” Sharma said. “One of the players has to be really suffering. Those conditions are not yet there in the market.”
“The model is different in a lot of different countries and different time periods,” he said. “The only thing you can be sure of is that it’s something that needs to be constantly revisited and reviewed.”
To contact the editors responsible for this story: Sarah Rabil at firstname.lastname@example.org Crayton Harrison, Ben Livesey