Mobile Consolidation Wave is Inevitable

Sometimes it is hard to see real change in the global telecommunications or video entertainment business. The businesses are built on basic recurring revenue with historically high adoption rates, providing many features not easily replicated (access remains a unique role), and have already seen, in recent decades, at least a couple of major changes of revenue composition.

As recently as the 1980s and 1990s, global revenue was driven by long distance voice revenue. When deregulation, competition and new technology cannibalized the business, service providers were able to substitute mobile service revenue for the lost long distance revenue drivers.

Now that mobile adoption is quite high, globally, service providers are tapping mobile broadband as the near term revenue growth driver. But that eventually will reach a point of saturation as well.

Fitch Ratings says those maturation pressures were seen in the U.S. mobile business in the latter part of 2012.  “Many of the largest wireless service operators announced transactions or strategic investments that will likely result in further consolidation of market power among the top four wireless incumbents,” Fitch analysts say.

The Federal Communications Commission’s approval of Dish Network’s plan to use 40 MHz of AWS-4 wireless spectrum to operate a terrestrial-based mobile broadband wireless network was only one of the changes.

Softbank’s purchase of Sprint was the other “big” potential development, even as T-Mobile USA acquired MetroPCS. And although AT&T ultimately failed to buy T-Mobile USA, over regulator objections, that effort likely was a trigger for the subsequent deals.

But all those are only the first moves in a coming consolidation wave, jolting the U.S. business out of a period of relative stability on that score.

Fitch Ratings  believes further consolidation or transformative transactions will be necessary, especially among smaller wireless service providers, to bolster weakening competitive position relative to the market leaders AT&T and Verizon Wireless.

One reason is that the revenue models for all the contestants are quite mature. So despite the fact that profit margins are stable in the U.S. telecommunications and cable TV business, organic growth opportunities are “minimal,” says Fitch Ratings.

When that happens, acquisitions are the proven path to revenue growth. Longer term, service providers will have to find other very-large new revenue sources, though.