Bundling Strategies in ICT Sector: an Introduction

Transcription

1 Bundling Strategies in ICT Sector: an Introduction Edmond BARANES CREDEN-LASER, University Montpellier 1 Gilles LE BLANC CERNA Ecole des Mines de Paris B undling strategies and their effect on competition are now a wellestablished research topic in industrial economics. Bundling consists in the sale of two or more differentiated products combined in a set manner within a single package. This can be considered a sub-category of tie-in sales, where the sale of one product is somehow made conditional on the purchase of another a practice for which there is no shortage of examples, coming to us from a wide array of businesses: travel companies bundling flights, hotel, car rental, and accommodation in a vacation package; restaurants where you choose between a set dinner and the à la carte menu; computer offers combining central processing unit, software, display, and printer at a single price; and, of course, Microsoft Office and its various software applications. Since the late 1990s, the increasing technological "convergence" of voice, video, and data services has been facilitating the comparison of service offerings and intensifying competition between firms. Competing platforms (two-sided markets) provide a broad range of similar functionalities and more specialised functions not available from any other platform. Convergence is also changing the practices adopted by firms in terms of the pricing and structure of their service offerings. To reduce the intensity of full frontal competition, firms are pursuing strategies of price discrimination amongst consumers. As a result, they are multiplying their bundles or tied offers that incorporate complementary or substitutable services. Competitive pressure and changing consumption habits are encouraging firms to market bundles of services that include telephony, internet access and television. The telecom sector has thus offered a rich experimental field for bundling COMMUNICATIONS & STRATEGIES, no. 63, 3 rd quarter 2006, p. 13.

2 14 No. 63, 3 rd Q strategies. Competition between telecom and cable operators is heating up as attention turns from the "triple play" offering to the "quadruple play", a bundle combining fixed and mobile telephony, internet access and TV programmes. There are several goals behind this strategy, which vary depending on the type of player offering the bundles. For example, bundling strategies can allow entrants to gain market share, and incumbents to offset revenue losses to the competition (in telephone and access services). However, the practical scale and scope of profitable bundling is still an open and disputed question. Telecom Italia's dramatic U-turn just a few weeks ago, announcing the split of its fixed and mobile telephony divisions, and a new strategic partnership with Murdoch's Fox studio, illustrates the dilemma faced by these companies: horizontal bundle combining all voice and data services, or vertical bundle with access plus content. But one thing is clear: the entire competitive landscape is likely to be durably shaped by this bundling race. To explore the associated stakes and consequences in this relatively nascent research topic, our special issue aims to compare and contrast recent advances in the economic theory of bundling with the telecom and media industries' specific experiences and applications. A brief tour of basic bundling economics Over the last two decades, bundling has become an increasingly prevalent topic of Industrial Organisation research, as it creates a host of new competitive and regulatory challenges. Basically, the main concern for competition derives from the so-called ''leveraging market power theory'', where a firm with a monopoly power in one market combines the product it offers in that market with a second product in a bid to monopolize the second market as well. In oligopolistic markets with scale economies, bundling is seen as a profitable strategy, since it allows the exclusion of rivals by foreclosure of the bundled market (WHINSTON, 1990). But, apart from this (illicit) goal, one can distinguish between three main objectives for bundling: price discrimination, cost savings and entry deterrence. Bundling can first be understood as a very efficient way, in practice, to implement price discrimination. Since it induces consumer self-selection, it is far less information demanding (only the joint distribution of reservation prices amongst the population is necessary) than the theoretical optimal solution where you must collect individual customers' willingness to pay for

3 Introduction 15 each good. At the same time, it circumvents regulation forbidding explicit discriminatory pricing (a single price for the package). ADAMS & YELLEN (1976) introduced the basic conditions for bundling efficiency that afterwards shaped the research agenda on this topic. Recent works (SCHMALENSEE, 1984; McAFEE, McMILLAN & WHINSTON, 1989; SALINGER, 1995) extended the profitable scope for bundling. Secondly, in some cases bundling enables savings on production and transaction costs. The second effect is a rather obvious one since the sale of a bundle of goods or services automatically reduces the number of market interactions and the attached transaction costs. This term refers to various costs (direct or indirect because time consuming) incurred by the seller and the customer to establish their relationship: search for the best supplier, comparison of available prices and quality, negotiation and conclusion of the contract, enforcement of the contract. Production cost savings are more case-specific and require the existence of potential scope economies. When this is the case, bundling can be seen by the firm as a more efficient distribution structure to market goods and services. NALEBUFF (2004) introduces a third role of bundling: to deter the entry of a one-product rival. He demonstrates that the gain from entry-deterrence (whether the entrant effectively enters or not) largely exceeds those generated by price discrimination. Here the market power serves to protect the firm's position in its non-monopoly markets, by deterring entry and mitigating the impact of an entrant or existing one-product rival. To conclude this basic introduction to the bundling economics issue, let us note that, in practice, firms' bundling offers are traditionally broken down into two distinct categories: horizontal bundles which aim to combine different services within a unified package, and vertical bundles which involve developing value-added services around a core service. The papers in this dossier To cover the multiple dimensions of bundling practices in IT sectors, and to investigate the various points of view on its potential impact, this issue of Communications & Strategies contains four articles, two interviews and a background paper. The first two papers explore the current empirical field of bundling in the telecoms market, with an overview of existing offers (PERNET) and a quantitative application to the Korean market (NAM et al.). Next, the competitive consequences of bundling strategies are assessed

4 16 No. 63, 3 rd Q both from a theoretical perspective (CRAMPES & HOLLANDER) and in the specific case of broadband Internet access (SHIM & OH). Finally, we have asked two key players from the bundling field a national European regulator and a major telco to share with us their views on the emergence of bundled offers, and how it could permanently change their business. To broaden the discussion launched with this special issue, we have also chosen to add a background paper, which places bundling in the global evolution of networks and the telecom industry's structure, marked by the increasing role of "overlays" (CLARK et al.). Below is a short summary of these different contributions. "Bundles and Range Strategies: The Case of Telecom Operators" by Sophie PERNET offers an empirical insight on bundling practices in the telecom sector. In particular, the scale and scope of existing bundled offers marketed by telcos in Europe, Japan and the US, the underlying technological choices, and the role played by bundled offers in operators' differentiation are reviewed. The practical question of "how to build the best bundle among many possible combinations of services" is rarely examined in the literature. In "Optimal Bundle of Multimedia Services in Emerging Mobile Markets", ChanGi NAM, SeongCheol KIM, DeockHee CHO and HyeongJik LEE explore the optimal service bundle among five emerging mobile services in the Korean market. They point out how making a timely decision regarding the value maximization of bundled service is directly related to service providers' future growth, and the differentiation features offered to customers. In "Triple play time", Claude CRAMPES and Abraham HOLLANDER examine the competitive effects of the digital convergence of telephony, television and Internet into what they call the "triple play adventure". They argue that the business process reengineering initiated by triple play will call for significant adaptations by the competition authorities and the sectoral regulators, discuss the efficiency arguments, and illustrate these challenges with examples of recent litigations. The specific competitive case of bundles involving broadband Internet access is discussed by Sunghee SHIM and Jungsuk OH in "Service Bundling and the Role of Access Charge in the Broadband Internet Service Market". They model the incentive for a cable service provider to bundle a broadband Internet service. The analysis of this type of bundling strategy by the market incumbent, with ownership over existing bottleneck facilities,

5 Introduction 17 underscores the distinction between full and partial market coverage in competition outcomes and social welfare. The result suggests that this market dimension could be introduced profitably by policy-makers and regulators when establishing access charges. Next, you will find the work of Dave CLARK, Bill LEHR, Steve BAUER, Peyman FARATIN, Rahul SAMI and John WROCLAWSKI who argue that the emergence of numerous types of so-called "overlay" networks (such as content-delivery caching networks, peer-to-peer file sharing networks or Voice over IP services) will have critical technological and policy implications for the evolution of next generation Internet architecture. In "Overlay Networks and the Future of the Internet", they propose a taxonomy for thinking about these overlays, provide several examples of their scale and growing importance, and analyse their possible implications for Internet architecture, industry structure, and policy.

6 18 No. 63, 3 rd Q References ADAMS W. & J. YELLEN (1976): "Commodity Bundling and the Burden of Monopoly", Quarterly Journal of Economics, 90, August, pp McAFEE P., J. McMILLAN & M. WHINSTON (1989): "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values", Quarterly Journal of Economics, 104, May, pp NALEBUFF B. (2004): "Bundling as an Entry Barrier", Quarterly Journal of Economics, Feb., vol. 119, no. 1, pp SALINGER M. A. (1995): "A Graphical Analysis of Bundling", Journal of Business, 68(Jan.), pp SCHMALENSEE R. (1984): "Gaussian Demand and Commodity bundling", Journal of Business, 57, 1, pp WHINSTON M.D. (1990): "Tying, Foreclosure and Exclusion", American Economic Review, 80, pp