Tuesday, March 01, 2011

Bundles - OECD analysis of the benefits and drawbacks of bundles for broadband customers

[oecd] Bundling can provide both benefits and drawbacks to broadband customers. In general, bundled services are less expensive when purchased together and consumer surplus from one good in the bundle can help “subsidise” another less-valued element. Bundling also allows the integration of products in a way that benefits consumers such as by giving them unified billing, a common helpline number or the integration of voice mail message retrieval via the television set.

In other cases bundles can lead to situations where customers are worse off. Consumers may be required to purchase a bundle which contains one product they value and others they do not. Bundling also raises some significant concerns regarding transparency and consumer “lock in”. Bundles may make it difficult or impossible for subscribers to switch providers of certain bundled services and not others.

An OECD data collection of over 2 000 offers of stand-alone and bundled services from 90 firms across 30 OECD countries reveals that broadband services in the OECD are overwhelmingly sold as mixed bundles, allowing users to choose among stand-alone offers or bundled services. Of the 90 operators surveyed, 77% allow users to buy stand-alone broadband service. 17% tie broadband service to a fixed-line voice service and 4% require a television package to obtain broadband access. Only 2% of the offers surveyed required subscribers to take a triple-play service to have broadband.

Broadband bundles are typically sold with a significant price discount over stand-alone prices. The average bundled discount compared with buying the services separately is USD 15 (PPP) per month or 26%. The average price of a triple-play bundle across all countries and operators is USD 65 (PPP) per month, while the median price is USD 59 PPP. The average entry-level price for a triple-play bundle is USD 41 PPP per month.

Consumers often consider the incremental cost of adding broadband to an existing phone and television subscription. The minimum incremental cost of adding broadband service to an existing service ranges from USD 0 to 37 (PPP) across countries in October 2009. Overall, the average incremental price of broadband once a user already has a phone or cable line is USD 15 (PPP). This is, on average, a 32% reduction off the minimum stand-alone price available in the market.

Bundling plays a key role in extending broadband access to those who value it less than the lowest stand-alone price in the market. There are 14 countries where consumer surplus is maximized for a consumer by a bundle which includes a broadband component even when the user places a value on broadband below the minimum stand-alone broadband price in any market. Broadband is also a component of the welfare maximising bundle in two countries (Switzerland and France) even when the
user’s perceived value of broadband is set at zero.

The benefits to consumers largely derive from having a choice between stand-alone and bundled services and stand-alone offers still play a key role in maximising consumer surplus. The percentage of countries where a consumer’s optimal service selection includes at least one stand-alone service varies between 43% and 63% when users are willing to pay the OECD average monthly price for voice (USD 19 PPP) and video (USD 24 PPP) and their willingness to pay for broadband varies between USD 0–50 (PPP) per month.

The availability of stand-alone services will also play a key role in the competitive potential of overthe-top (OTT) services that allow consumers to watch video or make voice calls “over-the-top” of an existing broadband connection. The development and maturation of these services may lead to more users subscribing to just stand-alone broadband services. Because OTT services require a certain level of network quality to function correctly they should be considered in any debates surrounding traffic prioritisation/network neutrality.

The complexity of communication offers and bundles has made it increasingly difficult to understand and compare service prices and characteristics. A lack of transparent information about services and their prices makes consumer price comparisons more difficult and leads to market inefficiencies.

Regulators and consumer-protection agencies should encourage ISPs to provide more information on the characteristics of packages they are selling and to make prices clear and understandable for consumers.

Some regulators may consider requiring ISPs to include all services, fees and taxes clearly in one total price which is available visibly on the website. Websites and tools that can help users compare bundled offers are beneficial to the market and lead to stronger price and service competition. Regulators may be the best positioned to build these tools.

Bundled services can also lead to consumer lock-in for sub-optimal service choices if subscribers are not able to switch providers easily and with minimal expense. One of the key responsibilities of telecommunication regulators is to ensure that markets function efficiently and that consumers can switch providers when better offers appear – essentially “voting with their feet”.

Regulators should take steps to ensure that switching is as simple as possible for consumers by addressing any procedural, financial or relational switching barriers. Procedural costs can be addressed by requiring better price information from operators, seamless switching across providers and number portability across services. Ensuring users can port numbers at any time during a subscription and making porting available to over-the-top providers could also help improve consumer mobility.

Telecommunication providers often require minimum contract lengths to cover their fixed costs but consumers should be allowed to move to a month-to-month contract once the initial term is over.

Regulators and competition authorities may need to work together to address lingering problems with market dominance, noting that operators face varying levels of competition in different areas of the country. This may also include examining options for sharing infrastructure either via extended unbundling regulations or by investments in separated/mutualised infrastructure.

Incremental improvements in consumer broadband valuations can lead to higher broadband take-up and its resulting network effects in the economy. Boosting the perceived value of broadband (e.g. willingness to pay) to USD 25 (PPP) would make broadband a part of an optimal service mix in all OECD countries assuming consumers will pay the average OECD price for stand-alone voice and video.

Governments can work to increase broadband value by making more public-sector information available and reducing any barriers or disincentives to interacting with the government online. Governments can also increase the perceived value of broadband connections by helping to promote the adoption of smart-grid technologies for electricity, reducing bureaucratic blocks to effective e-health applications, developing innovative online transportation applications and making more e-learning options available.

Broadband Bundling: Trends and Policy Implications OECD Digital Economy Papers No. 175. DSTI/ICCP/CISP(2010)2/FINAL

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