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Value of big US mobile operators plummets as market consolidation looms

tentative m0ney

via Flickr © peddhapati (CC BY 2.0)

One thing we can be sure of is that 2015 will see some pretty brutal industry consolidation, not least in the US where the Big Four mobile telcos are facing a nasty and, for some, a possibly lethal, combination of declining subscriber ARPU, ongoing and deepening price wars and the destruction of share value.

The received wisdom is that, globally, operators, fixed and mobile alike, are being forced into a period of consolidation and rationalisation driven by the urgent need yet again to cut costs whilst, simultaneously, struggling to achieve ever-greater economies of scale.

The rationale is that the only way to boost ARPU is to provide subscribers with premium services based on fibre and LTE. To do that the operators have to spend huge sums on the deployment of new comms technologies and improving the quality of existing infrastructure whilst cutting costs at the same time. That's a hard circle to square.

This is the argument that the big operators would like the rest of us to accept. If you believe their take on things they unexpectedly find themselves between a rock and a very hard place indeed with the aforementioned falling ARPU, allegedly increased competition and massive capital expenditure levels being exacerbated by what the telcos like to call "inflated" price of spectrum (even though it is competition between them for the bandwidth that is driving up the price and giving investors the jitters). On top of all that the established network operators will soon have to define and employ sensible strategies to take full advantage of disruptive emergent technologies such as SDN, NFV and MEC.

What's more, since Thanksgiving the four US national mobile operators and their investors have has to sit and watch aghast as share prices have plummeted and stocks have been dumped. An article in the Wall Street Journal concludes that thee Big Four US cellular carriers have lost upwards of US$45 billion in market value since late November, a figure, the newspaper points out, that is in excess of the market capitalisation of both Sprint and T-Mobile - combined.

Sprint is the company taking the biggest bashing. It lost 16 per cent of its value in the week before Christmas mainly because of market perception that it is neither fish nor fowl and is apparently unable or unwilling or both to take the actions necessary to put things right.

It has very reluctantly cut subscriber prices but the revisions have been late, grudging, partial and insufficient to staunch customer churn. At the same time it has failed to attract sufficient new premium subscribers to offset the value of departing customers while its LTE deployment timetable (which is vital to its growth strategy) is badly behind schedule and the delay has resulted in loss of network quality which has further angered customers.

And Sprint didn't even take part in the AWS-3 spectrum auction. Things would have been even worse had it done so. The fact is that Sprint is caught in spiral that it seems incapable of correcting and an increasing number of analysts think is is only a matter of time before it will crash and burn.

Other big cellular telcos are in a mess as well. For example, T-Mobile lost 10 per cent of its value over the course of  the first week of December. Meanwhile, Verizon dropped six per cent and AT&T went down by five per cent mainly because both companies were forced to issue revised forecasts and warn of lower than expected profits this reporting quarter.

Given the parlous state of affairs, consolidation seems both inevitable and even desirable - for institutional investors, investment banks and some top telco management anyway, if not for hapless rank and file employees and end users. In a recent note US investment bank Jeffries LLC observed that there are mounting doubts about the "sustainability of the four-player market in the US" and added that "without a more accommodative Mergers and Acquisitions environment, short-term lower pricing for consumers will likely end poorly for all”.

The writing on the wall

In reality there seems to be little US cellular operators can do other than reluctantly (or not so reluctantly) embrace consolidation. Sure they could keep profit margins up for a while by accepting and embracing loss of market share, but that would be a hell of a gamble requiring the rejection and managed churn of low ARPU subscribers while simultaneously trying to hold on to existing high-value customers and attracting large numbers of new ones willing to pay a premium for guaranteed network quality and reliability, added value services, better customer support and a wide choice of new, top-of-the-market, state-of-the-art devices. Now that is a balancing act to see.

However, the reality is that Sprint and T-Mobile are already focusing more and more on the pre-paid and lower ARPU end of postpaid sectors while AT&T and Verizon are increasingly going head-to-head in a fight to gain and retain high ARPU consumers. Not all of them can win.

And then there's LTE. Heavily touted on both sides of the Atlantic as '4G' although it is nothing of the sort, the technology has taken time to gain user acceptance, mainly on the grounds of the expense of user tariffs combined with frequent network outages and faults and it certainly has not generated the optimistic levels of profits that the operators hope, boasted and expected that it would.

For carriers there actually is a silver lining in all this, hard though it may be to discern. The network will soon be virtualised and when that happens software-defined networks based on the economics of IT–commoditised hardware will become the norm. They will run network functions as applications in the the cloud whilst taking advantage of comparatively low-cost mobile cell sites.

AT&T understands and accepts that SDN and NFV are the future and has thus developed its 'Domain 2.0' programme in accordance with which it will transfer network functions to the cloud and employ a 'next generation' platform based on SDN that will provide for significant and continuing reduction in capital expenditure. By taking such a route AT&T is clearly differentiating itself from Verizon and the operator says its network will 75 per cent software-driven by 2020.

Change is in the air and over the course of the next twelve months we will witness a major shake up in the US cellular sector with expected (or perhaps unexpected) winners and losers. However, we have also seen, time and time again, that while price wars can and do lower subscriber bills in the short-term, in the longer term they  often result in reduced competition, less consumer choice, increased tariffs and declining customer service. The remaining operators will deny it, of course, but it will happen. Wait and see.

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