Scale (Geographic and Account Value) Matters

Scale matters in the telecom business. Verizon Wireless EVP Ronan Dunne recently pointed out two examples of scale benefits: greater geographic scale and greater account scale.

There are “more than 100 regulated carriers in Europe in a footprint that's not materially different from the U.S., so it's a highly fragmented market, national market, national regulation despite the European umbrella,” said Dunne. “So the smallest carrier in the U.S. is about twice the size of the largest domestic carrier in Europe.”

To the extent that scale leads to operating efficiency, the four leading U.S. mobile service providers have greater opportunities to gain such advantages.

A decade ago, for example, it routinely cost some mobile operators as much as US$400 to US$600 in new account acquisition cost to add one new account in the U.S. mobile market.

By 2013, new customer acquisition costs arguably had dropped in some markets. But, in Canada, new account costs still were in the CDN$500 (about US$400) in 2016.

In 2014, mobile operator new account costs varied wildly, from $169 at T-Mobile US to $1,440 at Sprint, with Verizon and AT&T in the $455 to $580 range.

source: Seeking Alpha

Buying patterns also create greater opportunities for scale in the U.S. market. Mobile is bought in Europe mostly on single-user plans, where in the U.S. market the anchor is the family or multi-user plan.

There are a couple of obvious implications. The typical account size in the U.S. market is greater than in Europe, likely two to four times as great, all other things being equal, for a U.S. account, in terms of recurring monthly spend.

While such differences in recurring monthly spend do not lessen the importance of limiting churn, the larger typical account size in the U.S. market means U.S. carriers have an incentive to spend more effort and money on account retention.

That also creates, at least in principle, a greater incentive to create and maintain positive customer relationships, as each account is worth more. Again, at least in principle, that also means the opportunity to leverage any such relationships when packaging additional services.

So scale plays a role in network effects; operating and marketing efficiency; churn rates; opportunities to bundle new and additional products.