In an investment strategy first popularized by Warren Buffet, investors are encouraged to seek out companies that are surrounded by a competitive “moat.”
Investopedia, the online financial wiki, expands on this as a business’ ability to protect its competitive advantage, long-term profits, and market share from competing firms. This moat “serves to protect those inside the fortress and their riches from outsiders.”
AT&T and Verizon currently operate behind a moat of market dominance, but these companies did not reach the commanding heights of the wireless industry through organic growth alone.
Over the last two decades, these companies collectively executed nearly a dozen mergers to achieve a competitive advantage in market access, technology, and–most importantly–financial scale to invest in the diverse fixed and mobile broadband services that American consumers and businesses demand.
While every wireless carrier in America will need to invest billions in their networks to introduce 5G capabilities, not all those investments will have the same financial impact.
Hypothetically, if AT&T or Verizon were to each commit to invest $20 billion in 5G deployments, that investment would be spread across a base of approximately 150 million subscribers at a cost of about $130 per subscriber.
On the other hand, if a smaller competitor like T-Mobile or Sprint made the same $20 billion investment, it would only be spread across approximately 75 million subscribers for T-Mobile or 54 million subscribers for Sprint at a cost of $260 per subscriber or $370 per subscriber, respectively.
The net effect is that the same investment would cost T-Mobile twice as much or Sprint three times as much on a per customer basis. Now that’s a moat.
In this context, the proposed merger of T-Mobile and Sprint is so important. After combining, the new T-Mobile’s revenues would still be smaller than those of either AT&T or Verizon. But, for the first time, the two dominant firms would face competition from a player on similar economic footing.
This is why much of the opposition to the merger is so confounding. Self-identified “consumer groups” and “competition experts” have filed entirely predictable arguments at the Federal Communications Commission (FCC). These parties start with the premise that bigger is always bad.
The problem with this approach is that without any real analysis of the market and the true state of competition–and a knee-jerk opposition to any new mergers — the practical implication is to turn antitrust law and FCC competition policy upside down.
Instead of being the policy tools that break open closed markets to new competitors, they become the moat that protects the two dominant players in the market.
America’s international competitors are fully committed to deploying 5G networks to make their economies more productive and competitive on the world stage. America must do the same.
We led the world in 4G deployment because pro-competition policies incentivized investment. In the 5G world, this requires a level playing field where not just AT&T and Verizon have capability to fully invest in these critical networks.
That’s why MIT economist William Lehr recently wrote that the T-Mobile-Sprint merger “should be regarded as pro-competitive for the larger broadband ecosystem.” This merger will benefit American consumers and advance the U.S. in the global race to 5G.
Absent a merger, T-Mobile and Sprint will individually deploy 5G networks—but they will not have the scale necessary to compete directly on a head-to-head basis with AT&T and Verizon. T-Mobile is undoubtedly the most innovative and disruptive carrier in the market. But no level of innovation or maverick disruption can overcome the financial advantages AT&T’s and Verizon’s scale provides.
If America is going to have a fully competitive 5G marketplace, a merger between T-Mobile and Sprint is the best opportunity to bring that competition to AT&T and Verizon. To reject the T-Mobile/Sprint merger would allow AT&T and Verizon to retreat behind their moat into a castle of competitive advantage—and pull the drawbridge up behind them.
John Kneuer is the former Administrator for the National Telecommunications and Information Administration under President George W. Bush. He currently serves as a consultant to T-Mobile.