FCC Releases Eighteenth Mobile Competition Report

The Eighteenth Mobile Competition Report (“Eighteenth Report”) has been released by the Wireless Bureau.  “Consistent with the Commission’s first seven Reports, and the Fourteenth and subsequent Reports, this Eighteenth Report does not reach an overall conclusion or formal finding regarding whether or not the CMRS marketplace was effectively competitive, but rather it provides an analysis and description of the CMRS industry’s competitive metrics and trend.” (¶ 5).  We have summarized this report below, focusing on major trends and statistics.

Competitive Dynamics Within the Industry: Based on the Numbering Resource Utilization Forecast (“NRUF”) data, the Eighteenth Report estimates that the number of mobile wireless connections grew five percent, from 340 million to 357 million during the 2014 year.  (¶ 14).  CTIA’s data estimates that connections grew six percent, from 336 million to 355 million during this time period.  (¶ 14).   In 2014, AT&T and Verizon Wireless accounted for approximately two-thirds of mobile wireless connections while Sprint and T-Mobile accounted for approximately one third.  (¶ 15).  As of mid-2015, both T-Mobile and Sprint have seen increases from their 2014 connections: T-Mobile’s connections have increased from 55 million to 59 million and Sprint’s connections have increased from 56 million to 58 million.  As of mid-2015, regional providers count for under two percent of mobile wireless connections (as a note, the Seventeenth Report found that regional providers accounted for three percent of these connections).  (¶ 15).

Net additions totaled approximately 18 million based on NRUF data and approximately 20 million based on CTIA’s estimates.  (¶ 17).  Postpaid net additions showed significant growth during 2014, and in the second quarter of 2015, while prepaid additions have continued to decline as a percentage of total quarterly net additions.  (¶ 18).  While Verizon and AT&T continue to demonstrate growth, “of particular note is T-Mobile, which nearly doubled its net additions between 2013 and 2014, and this trend in net additions has continued strongly into 2015.” (¶ 19).  Furthermore, although Sprint’s net subscriber additions were negative in 2013, its net additions were positive in 2014, and through the first half of 2015, its net subscriber additions jumped sharply. (¶ 19).

The four nationwide service providers accounted for roughly 98 percent of mobile wireless service revenue nationwide in 2014, an approximate seven percent increase from 2011.  Verizon Wireless and AT&T accounted for approximately 71 percent of total service revenue in 2014.  While the big two continue to maintain the largest market share, T-Mobile had the largest quarterly increases in market share as measured by revenue through 2014.  The same pattern has continued during the first half of 2015.  Sprint, however, remains the third largest mobile service provider in terms of service revenues. (¶ 21).  The data shows that the “[t]op 4 providers have increased their share of overall industry subscribers/connections from around 66 percent in 2003 to around 98.5 percent by year-end 2014, meaning that the share of regional and local providers has declined from around 34 percent to around 1.5 percent during the same time period.” (¶ 22).  In 2014, total wireless service revenue was $187.8 billion, and in contrast to previous years, was a year-over-year drop of less than one percent.  (¶ 26).

The weighted average of the Herfindahl-Hirschman Index (HHI), a measure of concentration used in competition analysis for the mobile wireless services industry, has increased from 3,027 in 2013 to 3,138 in 2014. (¶ 24).  HHI values above 2,500 are considered “highly concentrated.”  As in previous years, the most recent increases in the weighted average HHI reflect continued industry consolidation, and the Eighteenth Report notes the acquisition by AT&T of Leap Wireless in 2014.

Overall Mobile Wireless Industry Metrics

Generally, as of July 2015: (a) more than 90 percent of the U.S. population lived in census blocks covered by at least four mobile service providers, but coverage of road-miles and of land area was much more limited (¶ 36); (b) approximately 92 percent of the population was covered by three or more service providers offering LTE coverage, while approximately 82 percent of the population was covered by four or more service providers offering LTE coverage (¶ 38).

Rural vs. Non-Rural: as of July 2015: (a) approximately 96 percent of the non-rural population was covered by four or more service providers and 63 percent of the rural population was covered (¶ 40); (b) almost 98 percent of the non-rural population was covered by at least three service providers offering LTE coverage, approximately 65 percent of the rural population had the same network coverage; (c) with respect to LTE coverage by at least four service providers, approximately 92 percent of non-rural America was covered, only approximately 41 percent of rural America was covered. (¶ 41).

Input Markets: The Bureau recognizes that “[c]ompetition in the mobile wireless marketplace will be better promoted by multiple service providers having the opportunity to access both low-band spectrum that can provide coverage and in-building penetration, as well as high-band spectrum that can provide the increased throughput for mobile broadband applications.” (¶ 48).

The Eighteenth Report finds that all four nationwide service providers hold substantial amounts of above-1-GHz spectrum:  Verizon Wireless, AT&T, and T-Mobile each hold a substantial number of PCS and AWS-1 spectrum licenses, while Sprint holds significant amounts of PCS spectrum. (¶ 61).   The Report also finds that AT&T and Verizon Wireless, each hold a significant amount of the available low-band spectrum:  when measured on a licensed MHz-POP basis, AT&T holds approximately 38 percent, while Verizon Wireless holds approximately 35 percent.  In addition, Sprint holds approximately 10 percent, T-Mobile holds approximately five percent, and a number of other smaller licensees, combined, hold the remaining approximately 12 percent.  AT&T and T-Mobile hold relatively more of their low-band spectrum in urban areas, Sprint’s and Verizon Wireless’s low-band spectrum covers both urban and rural areas, and the other smaller licensees hold more low-band spectrum in rural areas than in urban areas.  (¶ 62).

The Eighteenth Report recognizes that the Commission has established policies to make spectrum available to existing mobile service providers and potential new entrants through initial licensing, primarily by competitive bidding, and through secondary market transactions, specifically: the H-Block Auction, the AWS-3 Auction and the upcoming 600 MHz Incentive Auction, as well as the Commission’s updates to the spectrum screen in the Mobile Spectrum Holdings Report and Order.  (¶¶ 49- 56).  Future initiatives involve the 3.5 GHz band and exploring the use of spectrum above 24 GHz (¶¶ 58-59).   The Eighteenth Report finds that from January 2014 through June 2015 the Commission approved approximately 110 applications in total filed by the four nationwide providers to acquire PCS, AWS-1, Cellular, and/or 700 MHz licenses from a non-nationwide licensee or lease additional BRS/EBS spectrum from a non-nationwide licensee  (¶ 57).

Pricing Levels and Trends:  The most considerable developments in mobile pricing during the Report’s period of review are changes to the traditional, prepaid and postpaid pricing models.  In postpaid service specifically, the major developments have involved shared data plans, higher data tiers, device financing (iPhone promotions and handset leasing) and aggressive promotional pricing strategies.  However, the Eighteenth Report recognizes that analysts have recently noted signs of a possible stabilization of pricing.  Sprint and T-Mobile continue to have the most competitively priced plans at all levels and Verizon Wireless remains the most expensive option. (¶ 81).

Providers also continue to adjust the incentives offered to encourage subscribers to choose equipment installment plans (“EIPs”) and no-contract service plans over the traditional handset subsidy option.  One such example is the introduction of handset leasing programs to encourage subscribers to shift to no-contract plans.  During the period covered by the Seventeenth Report, T-Mobile remained the only nationwide provider that had ceased offering handset subsidies.  However, since then, the remaining nationwide providers have taken steps to limit sales of contract plans and bring an end to handset subsidies or have announced plans to do so. (¶¶ 86-88).

In addition, marketing tactics have increasingly focused on Early Termination Fee (“ETF”) buyouts to encourage customers to switch service providers.  These tactics generally rely on a series of limited-time ETF buyout offers, often timed to coincide with the launch of other types of pricing changes and promotions. (¶¶ 90-91).

One novel pricing change during this period was the launch of rollover data programs enabling mobile subscribers on usage-based data plans to roll over unused data from their monthly data allowances from month to month.  One of the differentiating features of rival rollover data programs is how long unused data remains available for use, for instance, T-Mobile allows its customers to use unused data for up to a year, while AT&T allows its customers to use unused data for a month. (¶¶ 92-93).

Prepaid: One noteworthy trend is an increase in prepaid subscribers switching to postpaid service. Analysts believe the option available to postpaid subscribers to purchase a handset on an installment payment plan with no down payment is an added attraction for prepaid subscribers because prepaid subscribers ordinarily do not have access to the device financing options available to postpaid subscribers, but instead have to pay the full price of handsets upfront. (¶ 95).  The migration of former prepaid subscribers to postpaid service in response to postpaid pricing and promotional changes is important background to changes in prepaid plan pricing in the period since the Seventeenth Report. (¶ 96).

Non-Price Rivalry: Mobile service providers also compete for customers through “investment, capacity, network coverage and technology, service quality, and advertising and marketing.” (¶ 105).  Over the past five years, wireless providers in the U.S. have made capital investments of approximately $146 billion.  This type of non-price rivalry can create competitive constraints.  AT&T, Verizon Wireless, Sprint, and T-Mobile spent a combined $13.9 billion in the first half of 2015 and $31.1 billion in 2014, accounting for close to 100 percent of total industry capital investment as tracked in these time periods.

Network Coverage:  In terms of road miles, the Eighteenth Report shows that Verizon Wireless covered around 87 percent, AT&T covered around 90.5 percent, Sprint covered around 47 percent, and T-Mobile covered around 58 percent as of July 2015.  Verizon Wireless and AT&T each covered over 60 percent of the U.S. land area with their respective mobile wireless networks, while T-Mobile and Sprint each covered less than 35 percent of the U.S. land area. (¶ 111). Each of the four nationwide service providers covered a significantly higher percentage of non-rural than rural land area and road miles. (¶ 113).  With respect to LTE coverage, Verizon Wireless covered approximately 308 million people, AT&T covered approximately 320 million people, Sprint covered approximately 280 million people as of October 2015 and T-Mobile expects to cover 300 million by the end of 2015. (¶ 115).

Mobile Wireless Devices:  In addition to offering more devices on prepaid plans, service providers have been promoting cheaper tablets,  in part to generate growth in data traffic and generate a market for future video offerings.  Internet device net adds (including tablets) were 1.97 million in the second quarter of 2015, down from 2.27 million in the second quarter of 2014, marking the first decline in three years.

Consumers and Trends in the Mobile Wireless Ecosystem:  In the third quarter of 2015, Android’s operating system accounted for approximately 52 percent of the smartphone OS market, while Apple’s iOS accounted for approximately 44 percent. (¶¶ 144 – 45).

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