LTE auctions will reduce the number of players in ultracompetitive markets

Universes expand and then contract. Similarly, mature mobile markets that have expanded over the past 20 years are on the verge of contracting over the next five years.

The catalyst is new license awards, which are set to radically change the competitive dynamics in some markets, and for different reasons than they did in the past.

Whereas 3G-spectrum auctions changed the competitive landscape by bringing in new entrants and thus expanding the number of players, 4G-spectrum auctions are likely to see a contraction in the number of networks built, and in some instances the number of operators, especially in developed markets.

And in markets that don’t see a decrease in the number of players, many will see fewer 4G networks built as a result of close cooperation between operators.

In the US, for example, T-Mobile is talking to cable companies and WiMAX provider Clearwire about a possible joint venture to enhance its spectrum position. T-Mobile USA is the smallest of the large nationwide US operators – it controlled just 11.63 per cent of the market at end-2009, according to Informa Telecoms & Media research – and lacks the scale of its big rivals.

Unlike bigger rivals AT&T and Verizon, T-Mobile USA does not have 700MHz licenses for building an LTE network, and it is not counting on the FCC’s national broadband plan to fulfill its spectrum needs.

Germany offers a similar story of small players banding together to offer 4G to better compete with large rivals. Many expect that the country’s two small players, Telefonica-owned O2 and KPN-owned E-Plus, will either merge or combine their network assets into a joint venture because they don’t have the resources to build their own LTE networks.

But whether or not they merge, the market won’t see any new entrants come into play. T-Mobile, Vodafone, O2 and E-Plus are the only four applicants in the country’s forthcoming auction of licenses in the 800MHz, 1800MHz, 2000MHz and 2600MHz bands.

Other crowded markets where small players battle against much larger rivals are also almost certain to see consolidation around spectrum awards for LTE. The UK is one of these markets, where 3G new entrant 3 is likely to be acquired by Vodafone or, less likely, Telefonica.

In countries where LTE spectrum has already been awarded, there has been scant interest from new entrants, and governments have reaped meager amounts from awarding new licenses. Finland saw no new entrants after it awarded LTE licenses; Norway (Craig Wireless) and Sweden (Intel) saw one each.

And pointing the way forward for operators in other countries, Telenor and Tele2 have struck a deal to construct a joint LTE network in Sweden, with plans to launch services based on the technology toward the end of 2010.

Although it makes sense financially for operators to combine their efforts to roll out LTE networks, from a competitive standpoint sharing core networks remains an untested proposition. It remains unclear how much differentiation operators can pursue at the service level when they have little room for differentiation at the network level. Moreover, no matter the level of cooperation, network-sharing agreements are notoriously complex and could foreclose on future strategic options, such as M&A. It also remains unclear what effect having fewer competitors offering services will have on the price end-users pay for mobile services.

Regardless of the potentially negative consequences of having fewer LTE networks being built, smaller players in highly competitive markets will be swallowed up by stronger rivals because they are unable to bid on their own for new spectrum. This promises to create an entirely new dynamic in markets where consolidation around LTE spectrum awards takes place.

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