OpEd – Evaluating Competition in the Digital Economy

OpEd – Evaluating Competition in the Digital Economy

An edited version of this OpEd was published by PSBJ – AT&T-Time Warner decision shows DOJ needs to adjust its M&A rules

Evaluating Competition in the Digital Economy

Last month, in the AT&T-Time Warner case, the judge ruled against the DOJ. To many of us in the industry, it was not a surprise. We predicted the outcome. By all accounts, DOJ didn’t formulate a convincing case against the merger. The reason for its failure was simple. DOJ was applying old set of rules and principles in analyzing a merger in an ecosystem that looks vastly different from the era when some of the rules and tools for evaluating competition were formulated. We have been advocating for a refresh on rules to understanding competition. The very opening of Judge Leon’s verdict states, “If there ever were an antitrust case where the parties had a dramatically different assessment of the current state of the relevant market and a fundamentally different vision of its future development, this is the one.” The key operative word here is “market.” As we have written in the past, if regulators misunderstand the market, they are setting it up for failures.

Mainstream media seems to be catching-up to the notion of outdated antitrust laws. Opining on the AT&T-Time Warner verdict, The New York Times quoted, “It’s not wise or appropriate to view antitrust cases through the prism of pre-internet, pre-broadband age.” We proposed a more holistic approach to understanding the digital markets using the 4th Wave framework, wherein it is easier to understand the competitive dynamics of media, Internet, and telecom players.

I think this decision will pave the way for more M&As in the media and telecom space at an accelerated pace. It will likely improve the chances of the proposed T-Mobile-Sprint merger. Disney got DOJ approval to buy Fox properties in record time. AT&T acquired AppNexus to bolster is its strategy in the advertising space. We are likely to see many more such transactions in the second half of the year.

Competition has been the key pillar of free and open markets since ancient times. The Roman records of 50 BC indicate that legislators used regulations and policies to control price fluctuations and keep a check on unfair trade practices. Competitiveness is at the core of how markets evolve. Mobile operators have played a central role in bringing the networks online and providing reliability of a platform over which new services and applications can continue to germinate and thrive.

In his 1976 paper, Bruce Henderson, the founder of Boston Consulting Group surmised,

“A stable competitive market never has more than three significant competitors, the

largest of which has no more than four times the market share of the smallest.” We have studied the Rule of Three in the Wireless market since 2011.

In the case of mobile operators in a given country, the Rule of Three is followed with remarkable consistency. Of the 40 major markets we studied in 2011, on average the top 3 mobile operators controlled 93% of their respective markets. In fact, 36 of the 40 markets had the top 3 players control 85% or more of the market. Compared to 2011, of all the major markets we studied, only France increased the number of operators in the country. Otherwise, all other markets either saw a decline in the number of the operators. The average number of operators in these markets dropped from an average of 3.73 to 3.3. “Rule of Three” is an observation not an opinion.

In the US, in 1996, there were 18 players providing mobile services. In 2018, we have the big four. The market dynamics are pushing the industry towards three. The routes that a country might take to the competitive equilibrium state might be different, but the observation is that they settle down to three. Additionally, it is not just the number of operators that matter in the market, it is the right proportions of concentration and market share.

Furthermore, the very market architecture has changed, so the competitive analysis tools will benefit from a complete rethink. If we don’t change the regulatory frameworks, we risk market failures. Competition on the access layer can no longer be seen through the lens of just the traditional metrics or competitive index tools like HHI when the market has fundamentally changed.

As industries converge and collide like media, broadband, and telecom have, the purview of the regulators has expanded but largely the framework to evaluate competition is still the same one. There is too much focus on the “access” layer and not much on the “platform” and “applications” layers. The digital economies are seeing more vertical mergers than horizontal mergers which is what the old regimes were designed to monitor.

So, the basic question becomes: If the market architecture has changed, if the competitive rules have transformed, and if revenue streams have been restructured, why keep an old regulatory regime to just manage the parts of the ecosystem that in the larger scheme of things, while essential, matter less and less? This doesn’t mean that the access layer shouldn’t be regulated but rather the regulatory regime should be expanded to look at “competition” more holistically. This will enable the regulators to anticipate changes a bit faster, adapt to the variables that are shaping the digital ecosystem, and help shape the engine for growth and job creation.

Chetan Sharma is CEO of Chetan Sharma Consulting, a consulting and strategy firm. He has advised Fortune 100 management teams, governments, and startups around the globe. He is author/editor of over 14 books and 150 papers on wireless topics.