How Much Churn, Revenue Loss Does Bundling Prevent?

Bundling of consumer services (phone, internet, TV, mobile) has, for several decades, been a foundational strategy in U.S. consumer markets. In simple terms, the strategy has been justified by the need for economies of scope, when economies of scale are dwindling. In other words, if the total number of customers if limited, or falling, one way to boost revenues is to sell more things to the customer base, where in the past it had been able to sell one thing to more accounts.

That is why the term “units sold” now is relevant. It is no longer the number of accounts, but also the number of services sold to each account, that drive revenues.

But bundling now also seems to hinge on “tie in” sales. In the United Kingdom, customers who want to buy internet access on the Openreach platform must also buy voice services. Similarly, to get the best rates, U.S. telco consumers often must buy voice to get internet access. Cable TV customers often find that the price for bundled voice, video and internet is priced so that it makes sense to buy three services instead of two, or two instead of one.

Service providers are well aware of the danger they face. If there were no price inducements, it is likely that voice subscriptions would fall faster and further, as the one product nearly every household wishes to buy is internet access. And even with all the inducements, only a half--or fewer--homes choose to buy voice on the fixed network.

There is evidence service providers are correct in believing bundling prevents significant revenue loss. According to a Deloitte survey, 74 percent of U.S. consumers “still subscribe to pay TV such as cable or satellite, but 66 percent of subscribers say they keep their pay TV because it is bundled with their internet.”

If that is an accurate guide to potential behavior, as much as 66 percent of the linear TV subscription business is in danger, and maintained mostly because of price breaks. As in the case of bundled voice and internet access, so video-plus-internet bundles might well disguise huge dissatisfaction with linear video services that would surface quickly if the bundling did not also represent cost savings.

The point is that internet access is the lead product for a fixed network selling to consumers, while voice is the least-wanted product. Video sits someplace in the middle, apparently. And even if the internet-plus-video is the strongest two-product bundle, demand is the issue. As Google Fiber found, far fewer than expected consumers bought the Google Fiber video service, than was expected.

So there now are indications that demand for linear video is far lower than once was the case. That is why experimentation with "skinny bundles" is so widespread. One element that can be adjusted is the retail price, to change the value-price relationship. And the easiest way to change retail price is to lower the "cost of goods sold," which means lower wholesale content costs.

Inevitably, that means buying fewer channels at wholesale.

Bundling does support gross revenue and unit sales beyond the levels that likely would occur without the bundling. But bundling also seems to work largely because it represents lower retail prices for a product the consumer really does want (internet access).