Wireless Industry Domination Worries FCC

Includes: S, T, VZ
by: Trefis

AT&T (NYSE:T) and Verizon (NYSE:VZ) together account for a little more than 60% share of the US wireless market. The Federal Communications Commission (FCC) recently released a report in which it has cited concerns that the US wireless industry is increasingly concentrated on a few players and that such concentration raises the possibility of anti-competitive practices.

Below we discuss how the wireless market concentration has increased over the years, and the impact on wireless carriers like AT&T and Verizon if the FCC were to regulate their market share growth.

US Wireless Industry Concentration Increased by 32% Since 2003

The FCC uses the Herfindahl-Hirschman Index to measure industry concentration. This index is calculated by summing the squares of market shares of individual firms and thus has a theoretical maximum value of 10,000 (based on an industry controlled by a single firm).

The FCC states that the Herfindahl-Hirschman Index for the US wireless industry has increased by 32% since 2003, reaching the current value of 2,848. Values above 1,800 for the Herfindahl-Hirschman Index indicate highly concentrated industries.

Several mergers and acquisitions in the US wireless industry have resulted in increased industry concentration. These include Sprint-Nextel (NYSE:S), AT&T-Aloha, T-Mobile-Suncom, Verizon-Rural Cellular, Verizon-Alltel and Sprint-Virgin Mobile mergers. Consequently, AT&T and Verizon have seen a market share increase of 3.1% and 7.5%, respectively, since 2005.

Concentration in the Industry is High, But is the Competition Effective?

Some of the direct expected consequences of increased industry concentration are anti-competitive practices and lack of choice for consumers. But is this really happening?

Although the iPhone is an example of a phone where US consumers are restricted to a single carrier for use of the phone, the iPhone has spurred innovation amongst mobile phone makers and helped to deliver many more smartphone choices on US carriers.

Over the last few years, Apple (NASDAQ:AAPL), RIM (RIMM), Google (NASDAQ:GOOG), HTC, Motorola (MOT) and Palm (PALM) have brought many new smartphones to AT&T and Verizon as the two leading US carriers seek to win over each others’ subscribers with the most capable phones.

This is not quite expected out of an industry that severely lacks competition. We believe that while the Herfindahl-Hirschman Index may be a reasonable measure of concentration, it is not necessarily representative of the level of competition within the industry.

Potential Downside of 8% for Verizon, 2% for AT&T if FCC Acts to Restrict Market Share Growth

We estimate that AT&T and Verizon will continue to gain market share owing to their wider portfolio of handsets, large coverage and competitive pricing. However, if the FCC were to regulate the wireless industry in a way that limits market share growth for the top carriers, this could lead to downside of 8% for Verizon’s stock and 2% for AT&T’s stock.

You can modify the forecasts below to see how Verizon’s and AT&T’s stocks are impacted due to negative growth of their market share.

Disclosure: No positions