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Summary:

The mobile landscape in the U.S. is balkanizing. The big regional carrier is disappearing, leaving us with four national operators dominating the cities and only the tiniest of carriers filling the gaps in between.

Back in the mid-2000s, there was a pretty vibrant community of mid-sized regional mobile providers in the U.S. Alltel ruled over the rural providers with 12 million subscribers and a bigger coverage area than even the nationwide carriers, while multiple operators — from Dobson Communications to Centennial Wireless — boasted millions of subscribers and were forces with which to be reckoned in their corners of the U.S.

No more. In the last five years all of those carriers and many more have been gobbled up by the national carriers. And the Big 4 have only come back to the operator buffet for more. In May, the biggest of the regionals, MetroPCS, was subsumed into T-Mobile. AT&T is now trying to buy up the last remnants of Alltel along with the current carrier occupying the No. 5 slot. Leap Wireless.

Merger ahead sign acquisition

If that Leap deal closes, there will remain only a single carrier apart from the Big 4 with more than 1 million subscribers. U.S. Cellular still hosts 5 million mobile connections, but it’s shrinking, not growing. It abandoned its two largest cities in June, selling its operations in Chicago and St. Louis to Sprint and shedding half a million customers in the process.

Have the smaller operators just given up on the mobile business? I put the question to a couple of veterans of the regional carrier world.

Go big or go small – there’s no room left in the middle

Pat Riordan, president and CEO of Wisconsin CDMA operator Cellcom, gave me an interesting statistic. When the M&A dust clears at the end of the year, Cellcom will probably move into the top 10 rankings of U.S. carriers by subscriber, he said.

Cellcom has a mere 300,000 subscribers. Verizon adds that many new customers to its rolls in a bad quarter.

Pat Riordan, CEO CellcomRiordan said that irony paints a perfect picture of the current state of the U.S. mobile industry. You have four huge operators on one side and about 125 small regional and rural players on the other. The big carriers manage more than 95 percent of the mobile connections in the country, while the Cellcoms of the country split the remaining 3 or 4 percent.

“That mid-sized group has just thinned out,” Riordan said. “Leap and MetroPCS were two of the last big ones, and there was always this hope that they would merge.” That hope ended when the T-Metro merger closed. Riordan said that deal wrote the obituary for the large regional provider challenging the Big 4 in the big cities. “I couldn’t see Leap lasting long once Metro sold out,” Riordan said. “They were both offered prices that they couldn’t turn down.”

Riordan predicted there would be more carrier buyouts before this consolidation wave is done. In fact, the big carriers are already shopping for tiny operators. Last week, Iowa’s Long Lines revealed AT&T will be taking over its rural mobile business. But Riordan said there are still a lot of resilient small operators in the country — ones that have been providing telecom service in their communities for generations and ones that carry little or no debt.

Lambeau Field Green Bay Packers

Green Bay, Wisc., isn’t New York City, but it’s not a hamlet either (it hosts an NFL team you might have heard of). Cellcom goes head to head against Verizon, AT&T and Sprint in its hometown and it remains the dominant carrier in northeast Wisconsin, Riordan said. It was one of the first small regionals to launch LTE, and it’s managed to secure devices like the iPhone and high-end Android smartphones necessary to stay competitive.

“I know large companies think small companies should all sell out, but we don’t agree,” Riordan said. “We think we’re still in a rapid growth stage.”

But when I asked Riordan if those small regional carriers would ever again grow into big ones, he was much more pessimistic. The mobile industry has balkanized, and if you’re not already a force in any given market, Riordan said, you stand little chance of becoming one. That’s why U.S. Cellular had to retreat from Chicago and St. Louis — it arrived in both cities late and couldn’t compete with the entrenched national operators. 

It all comes down to spectrum

As you might expect from the head of the largest regional operator lobbying group in the country, Competitive Carrier Association President and CEO Steve Berry is still positive about the prospects for small carriers in today’s America. But he also acknowledged the operators he represents are at critical juncture.

Steve Berry, President of CCA

Small and big carriers have always had a symbiotic relationship in the U.S. The nationwide operators would set the technology and the device agendas, and the smaller carriers would follow their lead. The regional and rural operators would build the same networks in the country’s hinterlands, which the big operators would use to extend their footprints through roaming agreements. The small operators could then get access to the same devices used by their larger counterparts.

But that all stopped with the advent of 4G, Berry said. The 700 MHz auctions last decade laid the foundation for today’s LTE networks, but instead of treating that spectrum as a unified band, AT&T and Verizon carved their own boutique bands out of 700 MHz, effectively blocking other licensees from using the same smartphones, tablets and mobile hotspots.

Without assurances that they would get compatible devices, those small carriers can’t justify building LTE networks, Berry said. Consequently only a few regional providers — mainly those with access to alternate spectrum — have deployed LTE. The rest are left with practically worthless licenses.  

Agarwal_Enterprise Marketing Function_cash imageIf the CCA can win concessions from Federal Communications Commission mandating interoperability and ensuring they can compete in the next spectrum auctions, then small carriers will thrive, Berry said. If they can’t, then their future could be quite grim. While small carriers are caught in LTE limbo, the big operators are hovering, their checkbooks at the ready. AT&T and Verizon may not want the small guys’ 700 MHz spectrum, but they’re definitely eyeballing the frequencies they’re already using for 2G and 3G services – especially in bigger markets.

“A lot of this is driven by the fact there’s a spectrum crunch,” Berry said. “The largest carriers are trying to top off their tanks, ensuring they have as much spectrum as possible before we get to the next auction. … Small carriers are rationalizing their spectrum holdings, and you have two large carriers with a lot of money to spend.”

The mobile industry chop shop

The mobile acquisitions we’re witnessing today are not the same as the acquisitions of five years ago. In the past carriers bought other carriers to get ahold of their networks, their customers and their market presence. That’s no longer the case.

T-Mobile, a GSM operator, took over CDMA carrier MetroPCS and immediately started shutting down its networks. It’s holding onto the Metro brand but in two years time there will be nothing left of the billion-dollar networks that Metro built. The same thing will happen to Leap if the AT&T deal closes.

Radio Waves Airwaves Spectrum

Those carriers were valuable because of the licenses they hold, which can be used to augment their acquirers’ current and future mobile broadband networks. The big carriers have become chop shops, buying up their smaller counterparts and stripping them of their airwaves. The most valuable frequencies are in areas where density and demand are highest. Consequently the carriers that hold licenses in the bigger cities — like Leap and Metro — get scooped up first.

Here’s what’s really messed up about that trend: in areas where you would think competition would to be most fierce, we’ll actually have the least number of carriers to choose from. In my home city of Chicago, there will only be four operators running their own networks to choose from once Leap is acquired: AT&T, Verizon, T-Mobile and Sprint. Meanwhile Charlottesville, Va., — a city of 43,500 people — hosts six carriers: the Big 4 plus U.S. Cellular and nTelos.

Make of it what you will, but this is the mobile industry we’re getting stuck with: A mobile landscape divided between urban and rural with nationwide megacarriers dominating the cities and tiny regional providers surviving only in the towns and communities in between. There might not be room for anything else in the middle.

Feature photo courtesy of Shutterstock user Nneirda; Merger image courtesy of Shutterstock user Gary Paul Lewis; Lambeau Field photo courtesy of Shutterstock user Ffooter; Frequency image courtesy of Shutterstock user fotographic1980

  1. Excellent article. While in theory these larger networks should be better resourced and so more reliable, but it’s a straight reduction in competition which may well lead to less value for the consumer.

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  2. consolidation is pretty much the opposite of balkanizing

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    1. Kevin Fitchard Tuesday, July 30, 2013

      Hi Lance,

      I see your point. The original term does refer to the splitting of a single state into multiple opposed ones. The story isn’t entirely about consolidation though, it’s about the disappearance of the mid-tier carriers and small carriers exiting urban areas. The differences between big carriers and small carriers now isn’t just size, but what parts of the country they occupy. I realize it’s not the perfect analogy, but I believe it still works here.

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  3. Richard Bennett Tuesday, July 30, 2013

    The US mobile market is more competitive than the markets in other countries. Last time I checked, the norm in Europe and Asia is two to three national carriers in each country, and virtually no small regional players.

    Digital networks are classic examples of economy of scale, and mobile networks more so than stationary ones because of roaming. Because we have hundreds of small, subsidized wired POTS operators, some folks have the expectation that hundreds of small mobile operators would be a good thing, but the more operators you have, the more balkanized the spectrum allocation map becomes.

    Part of the problem here is the wrong-headed insistence by some in Silicon Valley that the spectrum crunch is an illusion. In fact, if you want to have many carriers you need much, much more spectrum because of allocation inefficiencies. So to the extent that a shrinking pool of small carriers is a problem, those who insist that small cells solve all problems are part of the cause.

    The mobile market is now more about apps and smartphones than about networks in any case. I don’t see a long-term business case for small carriers except those that are exceptionally well managed and have access to the best phones and roaming agreements for customers who travel. It may very well be the case that the best use of spectrum in rural areas is for fixed broadband service to the farm and ranch. That’s not going to make the fiber bigots happy, but 30 Mbps LTE is better than 3 Mbps DSL or 15 Mbps satellite, and it doesn’t require an iPhone commitment.

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