Wireless Providers Merge to Compete
By IBISWorld Analyst Kevin Boyland
A flurry of recent merger and acquisition (M&A) activity in the Wireless Telecommunications Providers industry has led to renewed talks of long-expected industry consolidation. While the industry is already highly concentrated with the top four players controlling about 86.9% of the market, high wireless communication penetration and the subsequent slowdown in subscriber growth have limited organic growth prospects. To compete with market leaders AT&T and Verizon (a duo which many have called an effective duopoly), smaller players like Sprint and Deutsche Telekom’s subsidiary T-Mobile USA are adopting aggressive acquisition strategies to gain market share. As these companies endeavor to grow subscriber numbers in an increasingly saturated market, smaller prepaid wireless carriers have emerged as attractive acquisition targets.
What’s driving M&As?
Limited spectrum
Wireless spectrum, or the licensed radio frequencies over which carriers transmit their wireless communications, is an increasingly limited resource. Because the scope of a carrier’s spectrum licenses ultimately determines its coverage area, service quality and, thus, competitiveness, wireless carriers’ strategies are heavily focused on acquiring this commodity. The Federal Communications Commission (FCC), which licenses this spectrum, has presented a plan to free up some additional spectrum in the next 10 years. Whether such additions will fully alleviate the shortage remains to be seen; for now, the most effective way for carriers to garner a greater share of the available spectrum is to merge or acquire other companies in the industry. So crucial is this resource to the industry’s competitiveness that industry giants AT&T and Verizon have come under increasing scrutiny from the FCC due to concerns over a potentially anticompetitive environment. It was these regulatory concerns that blocked AT&T’s planned merger with T-Mobile in 2011 and required Verizon to divest a portion of the spectrum it purchased from a group of cable companies in 2012.
Market saturation
Capital costs in the industry have increased during the past five years as companies continue to aggressively roll out their fourth generation (4G) networks, which can cost billions of dollars to implement and operate. In such a capital intensive industry, an economy of scale, or spreading fixed costs over a large subscriber base, is essential. However, because the market is so saturated, acquiring new customers has become more difficult. AT&T and Verizon enjoy the lowest churn rates (i.e. the rate at which customers leave one service for another) in the industry, leaving little opportunity for other carriers to attract those players’ customers to their services. As such, acquisitions are the quickest way to add customers and grow economies of scale.
Coverage expansion
Companies in the Wireless Telecommunications Providers industry that offer a broader range of coverage to consumers maintain a competitive advantage over others. Acquiring another industry player’s preexisting network can rapidly expand carriers’ coverage and, consequently, potential subscribers, making it an attractive endeavor. In the past five years, acquisitions of prepaid mobile carriers have been the primary targets. These carriers service the low end of the market, offering cheap pay-as-you-go calling plans for no monthly commitment. These smaller-scale acquisitions allow carriers to expand their network coverage, making them more competitive in the wireless telecommunications market.
Risks involved
Overall, IBISWorld estimates that the Wireless Telecommunications Providers industry will have a low risk level in 2013, scoring 2.9 out of 9, with 9 representing the highest risk. Risk factors vary significantly on a company-by-company basis, however, especially in regard to M&A activity. Despite the competitive advantages that merging networks and spectrum can provide, incompatible technologies pose a significant risk to combined entities, as integrating these technologies or operating them in parallel can lead to financial loses. For example, following its purchase of Nextel in 2005, Sprint has had to operate its own CDMA network operations in parallel with Nextel’s iDEN network. Sprint hasn’t turned a profit since the purchase and plans to completely phase out Nextel’s network by 2014. Achieving technology synergies between different networks has become more complicated with the rollout of 4G networks; carriers are now, at the very least, operating their own legacy 3G networks and new 4G networks in tandem.
Recent M&As
With the abundance of spectrum, a large customer base and broad service coverage becoming ever-more important to a company’s success, 2012 has been a prominent year for M&A activity in the Wireless Telecommunication Providers industry. In October, Deutsche Telekom entered into a $1.5-billion agreement to merge T-Mobile with prepaid wireless carrier MetroPCS, the fifth-largest wireless carrier. The merger, if approved, will solidify T-Mobile’s position as the fourth-largest wireless carrier in the country, expanding its spectrum holdings and 4G network. Two weeks after the T-Mobile-MetroPCS announcement, Japanese wireless carrier Softbank surprised the market by acquiring a 70.0% stake in Sprint for about $20.0 billion. Sprint has since raised its stake in spectrum-rich Clearwire Corp from 48.0% to 50.8% and has acquired spectrum and just under 600,000 new customers from US Cellular, a wireless carrier based in the Midwest, for $480.0 million.
What’s ahead?
While approval of several recent acquisitions will not be determined until mid-2013, industry consolidation is inevitable. Even with the FCC freeing up additional spectrum in the years to come, the bandwidth-intensive applications demanded by today’s mobile devices will continue to make spectrum an incredibly valuable and increasingly rare commodity. As companies seek to grow their economies of scale by spreading their fixed network costs across large subscriber bases, smaller prepaid wireless carriers and mobile virtual network operators will continue to be attractive acquisition targets. While significant moves by AT&T and Verizon will likely remain heavily scrutinized by the FCC, the potential emergence of a legitimate challenger, such as Sprint, would likely ease such regulatory pressures for these market leaders.
To download full the research report for the industry discussed in this article, click on the report title below.
Wireless Telecommunications Providers
Tags:
