It's tidy in the textbooks: industries reach a stable structure as winners expand and losers go bankrupt or are consolidated. But the economic theory is to corporate reality as a steakhouse is to a slaughterhouse.
Take the U.S. wireless industry. On high (with more than 100 million prepaid and postpaid subscribers apiece), sit AT&T and Verizon. Both make solid returns on their considerable asset bases: $15-billion and $14-billion in free cash flow in 2011, respectively. Growth and margins are under pressure, but not collapsing.
Below these top two, however, it is a mess.
T-Mobile (33 million subs), left in the lurch after regulators blocked its sale to AT&T, just announced a $4-billion network upgrade plan, but that may not be enough to stop subscriber and revenue declines. Things are dicier at Sprint (49 million, which is trying to fund a network upgrade, subsidize adoption of the iPhone and prop up a half-owned subsidiary, Clearwire. Between the upgrade and the iPhone, Sprint will be cash flow negative in 2012 and beyond. Clearwire needs network investment, too, and burnt $600 million in cash last year. Google, one of Clearwire's strategic investors, just decided to sell its stake, bought for $500 million, at a 90 per cent loss.
Meanwhile, LightSquared, the would-be wholesale network operator, is now paralyzed after regulators decided earlier this month against allowing it to use satellite spectrum for a terrestrial network.
So mega-consolidation has been blocked by regulators. Micro-consolidation is needed, but how? There is a tangle of incompatible technologies, heaps of debt and enough losses to scare anyone thinking about financing a tie-up. Sprint reportedly came close to buying pre-paid specialist MetroPCS, but hardly had the balance sheet or the share price to get the deal done.
Lots more blood is likely to be spilt before America's wireless sausage gets made.