The phenomenon of economies of scale can be seen in many industries – particularly where there are large fixed costs, such as a mobile base station network, a graphics engine for videogames, or the turbines on a wind farm. In order to reduce costs as far as possible, operations should be made as large as is feasible. However, companies only have a fixed level of demand, which limits their ability to take advantage of this.
One way of increasing demand is to merge with a competitor, and therefore acquire a large number of extra customers. This, of course, is a major exercise and involves regulatory problems, costs of due diligence, changes to operations and governance, and many other factors. Rather than this drastic step, companies can collaborate to share costs across their combined userbase.
An example of such can be seen in the UK, where in 2007 Three and T-Mobile agreed to share the cost of the radio access network (RAN) for 3G services. The two companies set up a joint venture, Mobile Broadband Network Limited (MBNL), and transferred all assets in the RAN to its ownership. Each operator pays MBNL a set amount to cover the costs of maintenance, power, and depreciation of assets. The operators remain competitors, however, and continue to reduce prices in retail markets independently.
Such a sharing arrangement requires clear governance. If one operator’s traffic grows massively and causes shared equipment to malfunction more quickly, then that operator should bear a greater portion of the costs. In 2011, T-Mobile merged with Orange, and one of the conditions of merger was that the RAN share should continue, with Orange included.
Regulators will also carefully monitor sharing, as this can be a type of cartel arrangement. While it may be economically efficient for there to be only one network (a natural monopoly), this removes any competition incentives – so prices are not kept low, investment is not kept current, and research is not undertaken. While the point of infrastructure sharing may initially be to reduce costs, it may end up increasing them – and providing consumers with less choice.