Here’s why Verizon and AT&T don’t need to worry about suffering BlackBerry’s fate

September 22, 2013

(Photo by Glenn Fleishman)

BlackBerry's announcement that it is laying off 40 percent of its staff in the wake of massive losses is a reminder of just how volatile the smartphone market is. Hardware and software vendors in the smartphone business can see their fortunes wax or wane with astonishing speed.

Yet the market for wireless service is very different. There have been no significant changes in the competitive landscape of the wireless service market in the last decade. And that's not a coincidence.


(comScore)

Saturday, my colleague Andrea Peterson posted this chart illustrating how quickly the fortunes of mobile software companies have changed. A decade ago, in 2003, the phone software market was dominated by Nokia with its Symbian OS. Palm and Microsoft were Nokia's main competitors. BlackBerrys were just starting to become a mainstream phenomenon.

Five years later, in 2008, Symbian OS and Palm OS were losing ground, while BlackBerry OS and Microsoft's Windows CE led the pack. Apple's new iOS was growing rapidly and Android was still a minor player.

Today the market is dominated by Android handsets, with Apple's iOS as the only serious alternative. Nokia handsets running Microsoft software are a distant third. Palm and Symbian are dead and BlackBerry is close to it.

In contrast, the market for wireless service in the United States has barely changed at all over the last decade. In 2003, there were six major wireless carriers: Cingular, T-Mobile, AT&T, Verizon, Nextel and Sprint.

By 2008, Cingular had merged with AT&T and Sprint had merged with Nextel. Those mergers left four national carriers. Verizon and AT&T led the market, with Sprint and T-Mobile taking third and fourth place, respectively.

Today, nothing has really changed. Verizon and AT&T still lead the market. Sprint is still in third place. And T-Mobile still brings up the rear. Not only have there been no significant new entrants into the wireless business over the last decade, but the relative size of the major players hasn't even changed very much.

What accounts for the smartphone market's dynamism and the wireless market's lack of it? One factor is that innovation simply isn't very important for building wireless networks. Wireless carriers would dispute this, of course, pointing to their recent upgrades to fast 4G networking standards. But most of the innovation there is done by international bodies that develop new standards and hardware vendors who implement them. Deploying a 4G network across the United States is expensive and logistically difficult, but it's not very different from building a 3G network.

So wireless carriers don't compete on innovation, they compete on the breadth and reliability of their networks. And that leaves limited scope for new firms to enter the market based on superior technology.

Another factor is that building a cellular network requires one of the scarcest and least liquid resources around: spectrum. Incumbent wireless providers have already claimed a large share of the spectrum available for private parties to build wireless networks. New wireless auctions happen infrequently and take millions, if not billions, of dollars to win.

That leaves limited room for entrepreneurs to disrupt the wireless business. Entrepreneurial firms ordinarily start out small and then expand as demand for their products grow. That's not an option for building a wireless network, because firms need to spend millions of dollars buying spectrum years before signing up its first customer.

The most fundamental difference between wireless handsets and wireless networks is that the smartphones are tradable while connectivity is not. The robust competition in the smartphone market is possible because vendors can ship their phones anywhere in the world. American consumer can buy phones designed in South Korea (Samsung), Taiwan (HTC), Japan (Sony), Canada (BlackBerry), Finland (Nokia) and the United States.

That's not how wireless service works. If a company wants to offer service in the Washington area, for example, it has to acquire spectrum and build towers here. A German wireless company can't put its great wireless service in a box and ship it to the United States. And that means that the average American will never have as many options for wireless Internet access as she does for smartphones.

So the limited number of wireless options are not likely to change any time soon. Indeed, we only have as many options as we do thanks to pro-competitive policies of the Federal Communications Commission. The FCC has long had a "spectrum screen" that prohibited the largest carriers from obtaining a disproportionate share of the available spectrum. It regulates roaming charges to ensure that the customers of smaller wireless carriers can use larger carriers' networks when they are on the road. And in 2011, the FCC blocked AT&T's acquisition of T-Mobile, a deal that would have reduced the number of national wireless providers from four to three.

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