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Mobile analyst subjects AT&T T-Mob merger to HHI3 scrutiny

One mobile commentator in the form of Chetan Sharma Consulting thinks there is ample space to allow AT&T to merge with T-Mobile USA, without it necess

By PETER WHITE

Published: 12 May, 2011

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One mobile commentator in the form of Chetan Sharma Consulting thinks there is ample space to allow AT&T to merge with T-Mobile USA, without it necessarily distorting the competitive market for US cellular, applying what he calls the “Rule of three.”

Again, mobile is not Faultline’s area but the merger between AT&T and T-Mobile seems such an important subject, which will strengthen or weaken one of the real threats to US pay TV, that we thought we’d stay with it for a while.

The thrust of Sharma’s argument is the application of a well-used economic index called the Herfindahl-Hirschman Index (HHI). Sharma doesn’t actually say that the merger should go ahead, but in terms of market weight, parallels the AT&T T-Mobile deal to the situation in other countries, including the UK and Canada. The US Department of Justice uses the HHI as one of its ways of evaluating mergers.

In essence his rule of three is to point out that many markets around the world in many industries, there are often only room for three players, in particular 3 cellular operators often end up dominating a national market. Because applying the HHI index of HHI3 for the top 3 players, is carried out by squaring the market share of the three leading players, adding them together and then normalizing it as a fraction of 1. Hence a market split 30% 30% 30% among the top three players, which looks a pretty competitive market, gives a result of 900+900+900 = 2,700 which is 0.27 in this measure. He says that this is a way of comparing with other markets. We’re not sure it’s any better than just adding up all three market shares and seeing what’s left.

In a market with two players, however you cut it the HHI has to be something like 50% and 50% with the HHI being 0.5, if it is 75% and 25% it’s actually worse at 0.62 and a monopoly has to be 1.0.

Sharma argues that financial regulators use this and other formulae to calculate if a market contains sufficient competition, and that the critical level is a comparison with other markets. Before the merger for the US it is a market split of 33%, 31%, 16% = 0.23, similar to the competitive market shape we looked at above. After the merger AT&T jumps to 42%, Verizon is still on 33%, and Sprint 16% so this becomes 0.31, about the same as the UK.

He does put together a graph showing the cumulative market share of the top three operators in each market around the world, with almost all of them being above 80% but right now in the US sitting at just 73%. After the merger this would be 94%.

Sharma also argues that the rate of decline in US cellular voice minutes is about middle of the league table with India’s prices declining the fastest and South Africa, Argentina and Denmark declining the least. This rate of decline of voice minutes is a clear indicator of competition, in that if operators do not lower voice prices, customers will move.

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