Does Bundling Still Work?

What comes next for service provider triple play or quadruple play bundles, which gradually have become the dominant way fixed network service providers package and sell their services?

The question might become more relevant for a wider number of service providers as the original value--churn reduction--loses its effectiveness. "Bundling is at a crossroads," says Matt Davis, IDC director. The problem is that bundling, which initially proved a strong weapon for combating customer churn, now is losing its effectiveness.

That was more true in the early years of the first decade of the 21st century, but has become less effective since perhaps 2008. “Saving money” once was the big draw, though.

Of 4,400 consumers surveyed by KPMG in 16 countries in Asia, Europe, and North and South America, 57 percent indicated attractive pricing attractive pricing was the most important driver in the decision for signing a bundled service contract.

Of those who do purchase bundled service packages, 75 percent did so primarily to take advantage of lower pricing. Only 12 percent acknowledged convenience as a factor.

How much churn protection now is provided is questionable, though. About  56 percent of survey respondents indicated that even if only one of the bundled elements they subscribe to were offered cheaper or better by another carrier they would readily break their contract and switch carriers.

Only 15 percent of respondents indicated that their current service package was 'sticky' and they would not consider switching.

"The popularity of service bundles in the Middle East is not just attributed to discounted pricing, but also to the convenience associated with converged billing,” said Hasan Sandila, IDC senior analyst.

In some cases, bundles can boost revenue or take rates. But for the most part, service providers have used bundles to combat churn by essentially locking customers into money-saving deals.

That works until virtually every competitor offers the same features and advantages. At least one study suggests the churn reduction is most clearly seen only under some circumstances, such as a recession that highlights consumer perceptions of, and need for, value.

In the next wave of development, bundles might emerge as ways of enabling additional features and services, or be provided in more-diverse combinations of services, Davis argues.

In some cases, the extension will be bundling of fixed with mobile or bundling of additional services to the traditional voice, video entertainment, Internet access triple play or the fixed network triple play with mobile service to form a quadruple play.

But Davis suggests change will be broader than that, moving beyond the offer of lower prices for bundle packages and towards “more choice” as well.

Globally, telcos and cable operators will see bundle revenue from bundles grow by 65 percent from $124 billion in 2012 to $205 billion in 2018, according to Digital TV Research.

Triple-play subscriptions will reach 333 million by 2018; up by more than 300 million since 2008 and up by 239 million on the 2012 total.

Still, in markets where bundling traditionally has been most widespread, the value of bundling is declining.

By most estimates, at least globally, the amount of fixed network services sold as part of a bundle will grow significantly. How much incremental value service providers will derive, at least in some markets, is the issue.

When every major supplier offers a comparable bundle, the value of any particular value is less.

Verizon "Spot Deploys" Fiber to Home to Drive Maintenance Savings

Sometimes, doing what is more expensive winds up being financially beneficial for an access provider. 

If you ask a network designed what costs more--installing new customer drops one by one or all at one time--the answer generally is that the "all at one time" approach is cheaper, per line.

Sometimes the more-costly approach actually winds up saving an access provider money, however.

In 2013, Verizon Communications eliminated 600,000 repair dispatches (truck rolls)  as a direct result of migrating customers served by copper access loops over to fiber access, saving more than $100 million for Verizon.

The idea is that Verizon replaces drops that experience repeated trouble calls, as needed. 

That raises an interesting point about fiber-to-home economics in rebuild areas where copper access dominates. 

The original justification for installing fiber to home networks was a combination of revenue upside and cost savings. So some areas were completely rebuilt, allowing Verizon to sell FiOS video services, for example, while reaping the benefits of lower maintenance costs.

But Verizon at some point concluded that the business case, given other alternatives for capital investment, was not so high as one expected. 

To be sure, the economics of a "whole network" rebuild arguably are better than a "rebuild individual lines if customers complain" model. When a whole network is upgraded at once, Verizon gains the ability to share costs, such as trenching, pole attachments and dispatch of crews to install drops.

Compared to that approach, the overhead costs for replacing single drips, as needed, are higher.

But the overall economics probably are better for the spot deployment business case, nevertheless. The reason is that there is no "video services" revenue upside in an area where copper replacements are done as needed, and strictly to reduce maintenance costs.

Oddly enough, the more-expensive spot deploy method is more financially efficient, since it avoids the cost of building facilities that would be stranded (no customer revenue from particular drops). 

So Verizon saves by avoiding stranded investment. It doesn't build facilities that will not generate a return. Those savings allow Verizon to come out ahead, financially, even when it has to spend more on each discrete new fiber to home drop.

Smart Phone Shipments Will Be 82% of All Handset Sales in 2017

Global smartphone shipments are forecast to reach 1.8 billion in 2017, accounting for 82 percent of total mobile phone handset shipments, up from 55 percent in the third quarter of 2013, says NPD.

Devices capable of running on Long Term Evolution 4G networks will represent  41 percent of smart phone shipments in 2017.

But 3G high-speed packet access (HSPA) will continue to be the dominant air-interface technology, comprising 51 percent of the market in 2017.

The compound annual growth rate (CAGR) for smart phones over the next five years will reach 21 percent, while feature phones will decline at a CAGR of 16 percent, according to NPD researchers.

The majority of smartphone growth will come from the Asia-Pacific region, especially China.

China is forecast to grow 63 percent in 2013, and is expected to comprise 30 percent of the smart phone market by 2017.

Worldwide Mobile Phone Shipment Forecast

Source: NPD DisplaySearch Smartphone Quarterly report

How Will Service Providers Find Investment Capital When Revenues are Falling?

European service provider revenues from fixed network services across Europe will decrease at an overall rate of around two percent a year through 2020, while mobile service provider revenues decrease 1.5 percent per year through 2020, analysts at A.T. Kearney have forecast.

The decline in European  fixed telephony revenues accelerated in 2012 (-8.3 percent in 2011 and –31 percent over the last five years), driven in part by a negative five percent growth of fixed lines in service, according to European Telecommunications Network Operators association.

Since 2005, fixed line subscribership is down 22 percent.  The bad news is that mobile revenues, long the driver of industry growth, also are declining (-0.6 percent), according to ETNO.

That poses a problem for service providers as they contemplate investments in next generation networks built to supply very high speed Internet access connections.

The reason is that it is difficult to increase capital investment in any business when gross revenue is falling. The more typical strategy, in such cases, is to harvest the declining business, when possible, saving scarce capital for investment in new and growing lines of business.

To be sure, telecom executives already are working to boost revenue and reduce cost. But the combined effect of revenue, operating cost and capital investment  reductions would still result in a decrease in the European telecom sector’s free cash flow from €44 billion in 2011 to just €23 billion by 2020, A.T. Kearney analysts also project.

That makes heavy new investments problematic, as necessary as they might be.

By some estimates, it will cost as miuch as 200 billion euros to upgrade all European fixed networks for Internet access at 100 Mbps. That would be tough to do if free cash flow is but €23 billion.

The latest estimate from the European Telecom Network Operators association suggests telecom service revenue will decrease by close to three percent in 2013 among major European countries, representing a drop of about €7.1 billion.

Across Europe as a whole Etno estimates that revenues will decrease by 3.7 per cent in 2013, twice the decline in 2012.

In 2012, total capital expenditure across the industry reached €46 billion, of which €26 billion was invested in fixed networks and €20 billion in mobile, according to Idate, which also has forecast potential costs of upgrading European fixed networks as high as €229 billion.

The problem is that, as a rule of thumb, fixed network service providers invest no more than about 17 percent of revenues in capital investment every year, according to Infonetics Research.

Some might argue that network capital investment in many markets is far lower than that, representing single-digit percentage of revenue spent every year in all forms of capital investment.

The problem is that at €23 billion free cash flow, all of Europe’s fixed network operators collectively would not be able to spend much more than about $4 billion a year to upgrade their networks. At that rate, it would quite a long time to rebuild European fixed networks to support gigabit speeds.

What is the Economic Contribution of "Free" Services and Apps?

“Free” is an interesting conundrum for economists. it is hard to value something valuable, when it is given away. Sure, it is possible to measure the derivatives, such as advertising revenue generated by providers of free apps and services.

Traditional economic approaches based on measuring prices and quantities do not work well for goods with a price of “zero.” Though economics often is counter-intuitive in its implications, most people could agree that it seems disjointed in some way to maintain that any economy is worse off because people use Skype, Google Hangouts, free web browsers or most Internet apps.

People might agree that some of that usage cannibalizes some product provider’s revenue. But most also would agree that use of those replacement products also leads people to use “paid” products more than they otherwise would have.

And the common sense notion likely also is that such products make people and companies “more productive” than they had been before.

But the value of “no incremental cost” services and apps is hard to measure, since the non-monetized value cannot be captured in conventional ways.

Ever since Netscape “gave away” its browser, the value of "free" has been a source of debate, despite underpinning what is now called the “freemium” business model.

The Massachusetts Institute of Technology economist Erik Brynjolfsson points out that, according to government statistics, the “information sector” of the U.S. economy, which includes publishing, software, data services and telecom, has barely grown since the late 1980s.

That will strike many as a puzzling finding.

Using a new methodology, economists at MIT estimate the increase in consumer surplus created by free Internet services to be over $30 billion per year in the United States, about 0.23 percent of average annual gross domestic product between 2002 and 2011.

Perhaps that is a conservative estimate, but being conservative in applying such new measures is wise, since the methodology involves assigning a “hard dollar” value to a “soft dollar” metric of “time spent online” (on the assumption that time is money). Being conservative is wise since most of us can think of lots of ways that time online is not really productive.

The same sort of caveat might apply to other forms of “attention,” such as watching television. Most people would probably agree that not much of that form of attention adds measurably, if at all, to gross national product, aside from the value to networks and broadcasters of their created ad revenue streams.  

Will Most ISPs Eventually Offer Free 5 Mbps Service?

What happens to the retail rates of lower-speed broadband access if the market standard winds up being a gigabit for $70 a month, or a gigabit for $80 a month, or perhaps less? At $80 per month, a gigabit service implies a per-gigabit price of eight cents per megabit.

So the retail price of a 5 Mbps service “should be” 40 cents per month, or, in other words, nearly at the level of Google Fiber’s “free for seven years” 5 Mbps access service.

The caveat is that lower speed services always cost more, per megabit of service speed, than higher speed services, on a cost per megabit basis.

Still, even with that caveat, experienced practitioners from the network access business quickly will say that a fixed network cannot be built, under conditions where Internet access is the financial underpinning, when per-user revenue is just 40 cents a month, even when other current and projected revenue sources are available.

So the hope, or expectation, would have to be that almost nobody wants Internet access service at 5 Mbps, making the demand for such service virtually nil.

If that is the case, and most people want to buy services closer to the $50 to $70 a month level, revenue per user is not the problem, especially when other services can be sold in significant quantities.

The business model problem then shifts to costs, both capital investment and operating cost.

In fact, based on current levels of revenue “per user” generated by the largest Internet app providers, it seems fairly obvious that the whole idea behind “free access for seven years” is that, within 10 years, nobody will want such a service.

Some calculate that Facebook presently earns about $1.63 per user, per year, while Google earns $10.09 per user, per year.

At such levels, no rational ISP would expect to cover the cost of building gigabit networks based solely on advertising and other revenue generated by advertising and commerce transactions.

Still, the essential point is that if gigabit access, for $70 or $80 a month becomes anything close to a market-dictated reality, the cost of slow-speed Internet access (5 Mbps, at the moment, higher numbers in the future) might in fact be something very close to “free,” with ISPs expecting to earn higher revenues from sales of additional services of various types.

It might be reasonable to expect an ISP to charge for installation or use of required access equipment after the first outlet, as Google Fiber does. But the possibility remains that in a world where gigabit service is fairly standard, it might make sense to offer low-speed access essentially for free.

For starters, almost nobody would want such service. For the few that do, there likely will be other incremental revenue streams an ISP might be able to create, once that Internet connection is in place.

Video Mergers Might Challenge FCC Horizontal Concentration Policy

Regulators in the U.S. market might soon find they need to take one more look how to determine when the U.S. communication markets are too concentrated, or might become too concentrated.

The reason is the growing possibility that some possible merger or acquisition efforts in the U.S. market will test formal and informal rules about market concentration in the cable TV, satellite TV, voice and broadband services markets, both directly and indirectly.

Though the Federal Communications Commission and U.S. Department of Justice determined that AT&T would become too big if it acquired T-Mobile USA, negatively affecting competition in the U.S. mobile market, new tests likely are coming in the fixed network and satellite businesses.

The latest rumors either involve Charter Communications making a bid for Time Warner Cable, or perhaps even Comcast trying to buy Time Warner Cable. Then there is new talk about a potential merger between DirecTV and Dish Network, the only two U.S. video entertainment providers.

DirecTV and Dish Network tried to merge in 1992, but that merger was blocked by antitrust authorities, because of reduced competition concerns. Whether the markets now are sufficiently changed, with telcos now providing video entertainment, is the question.

The possibility that Comcast, the largest U.S. cable TV provider, might add Time Warner Cable’s assets might also challenge FCC rules about maximum market share in the cable TV business, which had been set at a maximum of 30 percent share of customers in “cable TV” business.

But that concentration rule was overturned by an appeals court in 2009. Over time the original rule that no single cable operator could pass more than 30 percent of homes was modified to mean that no single cable operator could have more than 30 percent of actual subscribers in the broader market, including satellite and telco providers.

Some would note that Comcast at present already has perhaps 43 percent share of video customers in the cable TV business, but only about 23 percent share of U.S. video entertainment subscribers, when the whole market, including satellite and telco providers, is examined.

A combined Comcast with Time Warner Cable would serve about 35 percent of U.S. video market customers.

Were DirecTV and Dish Network to merge, the new company would have 36 percent share of the traditional U.S. video entertainment business. That would also pose a challenge to the current rule that no single provider can serve more than 30 percent of total subscribers in the broader market.

At least so far, over the top services such as Netflix have not been considered part of the multichannel video subscription business, though that could change at some point in the future, especially if Netflix were to secure broad rights to distribute full versions of channels, if providers such as Comcast or Viacom were to acquire rights to sell, over the top, the same content they now sell as packaged services on their owned networks, or if the entire business shifts to new forms of delivery broadly disconnected from traditional delivery by access providers.