Must-know: Analyzing the market structure of the telecom sector

Telecom sector’s market structure

The telecom sector is currently dominated by the #1 and #2 players, Verizon (VZ) and AT&T (T), respectively. Despite the presence of a number of players, the sheer size of Verizon and AT&T gives the market structure a duopolistic character.

Smaller players like Sprint (S) and T-Mobile (TMUS) haven’t been able to match the larger players for size, resources, and scale. Verizon with a market cap in excess of $200 billion and AT&T with a market cap in the region of $180 billion, are outsized competitors compared to T-Mobile and Sprint with a market cap of $25 billion and $23 billion, respectively.

The telecom sector is a capital-intensive sector, requiring significant investment in infrastructure. As a cutting edge tech industry, bidding at spectrum auctions, network expansion, upgrades, and research and development (or R&D) investments need to be funded regularly.

Both have been pushing for more consolidation in the telecom sector in the U.S., saying the current trend for industry concentration in the telecom sector by the AT&T (T) and Verizon (VZ) duopoly is harming consumers through lower speeds, limited access, and higher costs. They contend that a combined company will be more effective in competing with the entrenched giants.

Masayoshi Son, chairman and CEO of SoftBank Corp. (SFTBF) and chairman of Sprint (S), in his keynote address to the Competitive Carriers Association (or CCA) on March 27, 2014, made the following points in a bid to garner support for a potential Sprint and T-Mobile deal. The CCA is an association of telecom service providers primarily serving rural areas.

1. Verizon and AT&T have increased their market share in terms of post-paid customers from 56% to 73% over the past five years.
2. Verizon and AT&T have increased their enterprise market share in terms of post-paid customers from 51% to 80% over the past five years.
3. Verizon and AT&T have increased their share of industry earnings before interest, taxes, depreciation, and amortization (or EBITDA) from 67% to 84% in five years. They’re over 100% in terms of free cash flow.
4. Made the point that rural areas are underserved by the duopoly. “The broadband access, not just wireless, but in the fixed line broadband access is converging. The wireless and wired broadband access is converging, and in the rural area it is underserved. So in many of the states it has very few options for the users,” said Mr. Son. He made a commitment to support CCA members with LTE capex and the development of the LTE network through both “financial and structural support.”

Despite the compelling case made by Mr. Son, Sprint may have called off the T-Mobile acquisition due to regulatory hurdles. A potential Iliad or Dish TV bid is unlikely to face these hurdles. Let’s see why in the next section.