China has authorized a fourth mobile operator, allowing state-owned China Broadcasting Network–which was created in 2014 to consolidate cable TV and broadcast operations in China–to enter the mobile services market.
Two angles are noteworthy. First, CBN marks the entry of the cable TV industry in China into the mobility business. Second, the move illustrates a continuing divide among communications regulatory authorities about the “best” market structure for mobile communications.
Given a choice, most seem to believe “four” providers a better structure (at least in terms of competition) than “three.” French regulators are foremost among proponents of a “three supplier” structure, largely to bolster the climate for more-robust investment.
The tension illustrates the problem regulators face. On one hand, they would likely prefer both vigorous competition and robust investment. On the other hand, excessive amounts of competition will choke off appetite to invest.
On a long term basis, some argue any structure with two suppliers, though not generally considered to be as good in terms of innovation, is the most stable market structure, the reason being that it is difficult for three providers each to maintain a minimum market share of about 30 percent.
That is a level many believe correlates with a minimum cash flow capability required to sustain long-term viability. By that test, China’s mobile operator market already is unstable, as only China Mobile has at least 30 percent market share.
Globally, profitability of operations for individual players correlates strongly with in-market scale measured by achieved revenue market share, McKinsey consultants have noted.
Sustaining an EBITDA margin of 30 percent can be considered a minimum proxy value for achieving capital returns above the weighted cost of capital, McKinsey says.
Entrants unable to capture a significant revenue share of their market–more than 25 percent– will be unlikely to achieve EBITDA margins above 30 percent.
That implies a sustainable long-term structure featuring just two providers.
There is an important caveat, however. If, somehow, the average cost of creating a mobile business should change in an important way, reducing especially infrastructure capital investment and operating costs, then it is possible sustainable market structures could change.
It might be possible, long term, for more than two major suppliers to be profitable. But that might hinge on major changes in capital requirements and operating cost. That is why all developments in network virtualization, access to shared and unlicensed spectrum, and networks based on use of unlicensed and shared spectrum, are important.
Such developments can change the industry cost profile. But most expect that such changes will come from “outside” the traditional confines of the industry, as have most significant changes in the Internet era.
In the access business, we have seen how Wi-Fi has changed cost structures. Now we see, in the U.S. market, the rise of third party providers such as Google Fiber and other independent ISPs, plus municipally-owned networks.
In the voice and messaging business, we have witnessed the substitution of over the top apps for carrier managed services.
We can expect more changes of these sorts over the next decade or two. The impact on sustainable market shares is unclear. It is possible that cost structures could change enough to make four-provider markets sustainable.
If that happens, it will be because capital and operating cost profiles have changed dramatically. Changes in spectrum policy–promoting spectrum sharing and more use of license-exempt spectrum–will play a decisive role.