Is Sprint a victim of 'The Rule of Three and Four?'

[Commentary] Bruce Henderson hypothesizes that a stable, competitive industry will never have more than three significant competitors and that the industry will find equilibrium when the market shares of the three competitors reach a ratio of 4:2:1. Taking a closer look at the wireless businesses of the four major operators in the U.S., the market share in revenue terms at the end of 2017 was: Verizon (38%); AT&T (31%); T-Mobile (17%); and, Sprint (14%). In terms of profitability as measured in operating income before depreciation and amortization (OIBDA), the relative differentials were even greater: Verizon (44%); AT&T (32%); T-Mobile (12%); and Sprint (12%). While it is highly debatable whether we can apply this hypothetical rule to the dynamic wireless industry in the US, I would argue that the general directionality of the “Rule of Three and Four” applies here. Further network investments in LTE-Advanced and 5G will require higher capital expenditure, and Sprint is certainly not in a good competitive standing to keep up the investment required. Outside of the top three, Sprint is attempting to improve its position through the consolidation with T-Mobile. So, is the T-Mobile/Sprint merger a big deal in the path towards network convergence and consolidation? For the near term, the answer is “no,” especially considering that the deal will take a year to complete. In the longer term, this deal will make a serious investment in 5G more possible, possibly forcing Verizon and AT&T to invest more as well.

[Kyung Mun is a senior analyst at Mobile Experts LLC]