Regulatory moves to stimulate mobile competition produces mixed results - New study finds uneven distribution of market power across global mobile industry

Efforts by national regulators to boost competition in their respective mobile markets have produced mixed results across the global industry, according to a new GSMA Intelligence report. The report – Competition and concentration: The distribution of market power in the global cellular industry – uses the Herfindahl-Hirschman Index (HHI) to measure levels of competition in national mobile markets, and outlines how regulatory initiatives and M&A activity are shaping competitive landscapes. It highlights markedly different trends between markets where new mobile entrants have boosted competition and those where market consolidation has led to a reduction in the number of market players. Western Europe and the Middle East are deemed the most competitive global regions, while North America has seen market power increasingly dominated by just a few large players.

In Europe, the report cites Romania as an example of a national mobile market that has become increasingly fragmented in recent years. Six years ago, Vodafone and Orange accounted for 97 percent of the country’s mobile connections but since then new entrants Cosmote (OTE) and DigiMobil (RCS&RDS) have increased their combined market share to 32 percent, dramatically reducing the dominance of the incumbent operators. This trend is even more evident in Middle Eastern markets such as the UAE and Oman where new market entrants have rapidly captured market share at the expense of a former monopoly operator (Etisalat and Omantel, respectively). This is also the situation in Qatar, where Vodafone has built a 25 percent market share within 18 months since launching as the first competitor to incumbent Qtel in mid-2009.

Other markets where a once-dominant market leader has seen its power rapidly eroded include Japan (NTT Docomo), Vietnam (VNPT) and Bangladesh (Grameenphone). GSMA Intelligence expects to see similar trends in many African markets over the next few years, including in Cameroon, Malawi, the Sudan and Zimbabwe. However, the introduction of new market players and regulatory initiatives aimed at increasing competitiveness has not always proved effective. The report notes that the large-scale restructuring of China’s telecoms industry in 2008 has not significantly dented the dominance of China Mobile – even though the market-leader is not nearly as dominant in new areas such as 3G. Similarly, regulators have not been able to reduce the market power of America Movil’s Telcel in Mexico (which still enjoys a 70 percent market share) and Safaricom in Kenya, which still has an 80 percent market share despite two major rivals launching in 2008 (Orange/Telkom Kenya and yu/Essar Telecom).

The impact of market consolidation was deemed the most significant factor in markets where competition levels have reduced in recent years. In the US, deals such as Sprint’s purchase of Nextel in 2005 and Verizon Wireless’ purchase of Alltel Wireless in 2009 means that the country’s three largest mobile operators – Verizon Wireless, AT&T and Sprint Nextel - now account for 80 percent of the country’s mobile connections, up from 48 percent a decade ago.

Similar trends are expected to be seen soon in major mobile markets such as Russia and India. Russia has 12 operators but the market is dominated by a “big three” – VimpelCom, MTS and MegaFon – whose market power is expected to increase as they acquire smaller local players. Similar levels of consolidation are expected in India over the coming years. But the report notes that the fiercely competitive nature of the Indian mobile sector means market power would still remain fairly well-distributed even if the number of players is reduced.

Using HHI, the study categorises national mobile markets as either fragmented (competitive) or concentrated (dominated by a small number of players) and benchmarks this against pricing trends. It found that the average EPPM (Effective Price Per Minute] in highly concentrated markets is lower than in fragmented markets, suggesting that price pressures are more intense in markets where a single mobile operator dominates. In both cases, price erosion has occurred at a similar rate over the past decade - with the EPPM decreasing from US$0.25 in 2000 to US$ 0.11 in 2010 in concentrated markets and from US$0.33 to US$0.13 over the same period in fragmented markets (see chart).

The trend toward lower prices in concentrated markets is linked to the fact that many smaller (or newly -launched) operators rely on a discounted pricing strategy in order to compete with the dominant players. As a consequence, ARPU at a dominant Tier 1 operator (defined as an operator with a market share greater than 20 percent) is typically 30 percent greater than that of a Tier 2 operator (a market share below 20 percent).

Joss Gillet, Senior Analyst, GSMA Intelligence:

Our study clearly shows that, over the past few years, M&A activity has reduced market concentration levels in North America and therefore reduced competition. In contrast, competition is intensifying in most fragmented markets, particularly in Europe and the Middle East. To counter the dominance of incumbent players, new entrants often tend to simplify their offers and pricing (e.g. SoftBank Mobile in Japan) or rely on innovative bundle deals (triple-play) and/or MVNO strategies. In addition, economies of scale and customer loyalty programmes play a critical role in price competitiveness, especially in markets where growth is driven by handset replacement. MVNOs in mature markets have played a critical role in stimulating competition. In 2011, we expect that the introduction of MVNOs will change market dynamics in South Korea, Brazil and Israel. In addition, other regulatory initiatives such as mobile number portability (MNP) and compulsory SIM card registration have had a positive impact on competition levels, often reducing the dominance of incumbent operators. Indeed, we predict that such regulatory moves will potentially reduce China Mobile's dominance, especially in the 3G segment. We also anticipate that MNP will affect mobile operator growth in 13 countries around the globe, whilst SIM card registration will be introduced in almost as many countries as last year (six) - mainly in Africa.

Effective Price Per Minute (linear average, US$) 2000-2010
Source: GSMA Intelligence