The trend for bundling products in ICT - Frontier Economics

The trend for bundling products in ICT
A PRESENTATION FOR ITS CONFERENCE - ISTANBUL
September 5 th , 2007
© Frontier Economics Ltd, London.

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The rise of triple-play and quad-play
Traditional divisions between voice (fixed and mobile), broadband internet
access and digital TV are breaking down
A number of providers have launched high profile offers of bundled products
Fixed telephony
Internet access
Mobile
Core product Extension to new products
TV
Content

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Bundles are available and valued by consumers
The emergence of these developments has been spurred by technological and
regulatory change:
Technology provides operators the ability to offer TV and VoD over
broadband with Mobile-TV and IP-TV
The trend for liberalisation have made wholesale products available that enable
more providers to offer full suite of retail services
Evidence suggests that consumers increasingly value the ability to buy these
bundled products

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… but the fact that it is feasible and valued, does not
mean is always profitable
In determining whether bundling is the best commercial option, the following
questions need to be addressed:
Does bundling increase the lifetime profitability of a customer?
Can bundling give a provider more sustainable competitive advantage to
enable it to maintain increased profitability?

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Can bundling impact lifetime profitability?
Lifetime profitability of a given customer depends on:
The costs incurred to acquire the customer;
The length of time that customer stays with the provider (customer retention)
The profitability of that customer during that period
If bundling improves any of these metrics, bundling may be a profitable
strategy

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But for bundling to be profitable, cost savings should be
greater than the discounts
With unbundled product offering, operator can earn a NPV per customer of £182*
Product
Voice (including rental)
Broadband
Total
Revenue/
month
20
20
40
Cost/
month
18
18
36
Profit/
month
N.B. Example is based on some of the most aggressive bundled offers in the market
* Calculations assume a 10% discount rate
2
2
4
Customer lifetime
(months)
60
60

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With bundled offer, NPV can be negative
With bundled product offering, NPV per customer down to -£728*
Product
Voice (including rental)
Broadband
Total
Revenue/
month
20
0
40
Cost/
month
18
18
36
Profit/
month
N.B. Example is based on some of the most aggressive bundled offers in the market
* Calculations assume a 10% discount rate
2
-18
-16
Customer lifetime
(months)
60
60

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To earn similar profit to unbundled situation, need to
reduce costs by more than 50%....
With cost reduction of 53%, NPV per customer is £136*
Product
Voice (including rental)
Broadband
Total
Revenue/
month
20
0
40
Cost/
month
8.5
8.5
17
Profit/
month
N.B. Example is based on some of the most aggressive bundled offers in the market
* Calculations assume a 10% discount rate
11.5
-8.5
3
Customer lifetime
(months)
60
60

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… and increase average customer lifetime (reduce churn)
Increasing lifetime per customer to 96 months, NPV per customer is £192*
Product
Voice (including rental)
Broadband
Total
Revenue/
month
20
0
40
Cost/
month
8.5
8.5
17
Profit/
month
N.B. Example is based on some of the most aggressive bundled offers in the market
* Calculations assume a 10% discount rate
11.5
-8.5
3
Customer lifetime
(months)
96
96

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A rush for market share?
If discounting passes on, or even goes beyond, cost savings, it would seem to
characterise a rush amongst participants for market share. But could greater
market share provide a competitive advantage?
For providers with fixed costs, a higher market share can promote economies
of scale
A greater market share might improve an operator’s chance of getting
favourable access to valuable content and advertisement spend
A rush for market share now, before customers become entrenched with
chosen supplier

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Should all providers join the rush?
Challenges and opportunities from bundling and the aggressive pricing, likely
to differ for providers according to:
The portfolio of services they already offer
The competition they face
The technology available to them
In the rush to bundle, providers should not neglect the factors that are valued
by their customers
Overall, not evident that bundling on its own can provide sustainable
competitive advantage

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