Why Bundling?

U.K. service provider bundled subscriptions will have grown by 20 percent from 2015 to 2020, with quadruple play revenues growing 300 percent, while total multiplay market revenues grow by 34 percent, Strategy Analytics predicts.

Dual-play subscriptions will peak in 2016 and begin to decline as customers move to triple and quad-play bundles, the firm estimates. By 2020, quadruple-play subscriptions will represent more than 21 percent of bundled subscriptions in the U.K. market.  

The bundled services trend--in any market--tells you quite a lot about the state of the telecommunications market. There are some advantages in terms of customer acquisition and retention.

Simply, most bundles are a form of discounting: “buy more, save money.” Once consumers have made those decisions, churn tends to drop, because dropping any one service means losing the cost savings of the whole bundle.

But bundling also tells you how hard it is (perhaps how “nearly impossible” it is) to build a modern fixed network and build a business model on any single service.

Competition, more than anything, is the cause. Assume a single-purpose network (voice, and entertainment video being the historical examples). Under monopoly conditions, the addressable market is nearly 100 percent of locations. The actual take rates were above 80 percent for video and above 90 percent for voice.

But add competition and the business model is unsustainable. Even if only two competitors split a market, neither is likely to gain more than half the available market. That means actual subscribers are gotten from about 40 percent to 45 percent of locations.

In other words, subscription gross revenue--all other things being equal--is cut in half. Add more competitors and the numbers get worse. And things never are equal. New competition also leads to price cuts. So gross revenue falls more than half.

Bundling allows any single provider to create a new revenue model based on smaller shares of bigger markets. Even if no single provider has more than half the market share in any product segment, any successful provider can maintain gross revenue by selling multiple products to the same customer.

A simple illustration: a supplier that formerly had 100 percent of the market for one product might instead have 33 percent of the market for each of three products. In such a case, the total number of sold units remains the same as under monopoly conditions.

Gross revenue per unit,and profit margins, are issues, but you see the logic.

The most important observation might be that bundling now is necessary because no fixed network can survive on revenues from a single product.

More change is coming, since virtually all existing legacy products in the bundle face product substitution or outright abandonment.