Bundling, Differentiation, Alliances, and Mergers

1. Bundling, Differentiation, Alliances, and Mergers Johannes M. Bauer Michigan State University First Transatlantic Telecom Industry Forum Montpellier, November 22, 2005

2. Agenda • Convergence • Bundling • Differentiation • Alliances and mergers • Synthesis

3. Morphology of convergence • Technological convergence • Markets: convergence in substitutes and complements • Organization, ownership • Regulatory convergence

4. Convergence triggers • General purpose technology • Policy changes • Telecom Act of 1996 • RBOC entry into long distance • Reduced unbundling obligations • DSL declared information service • Corporate strategy

5. Convergence and divergence • Integrating forces • Telecom+computing=telematics • Telematics+media=multimedia • Fixed+mobile+Internet • Disintegrating forces • Specialization, differentiation

6. Convergence, competition, strategy • Convergence in substitutes • Intensifies competition • Convergence in complements • Reduces intensity of competition

7. Convergence economics • Critical tension • High sunk costs • Commodification • Strategic responses • Bundling, differentiation • Alliances, integration, mergers

8. Bundling • Stabilization of willingness to pay • Creation of entry barriers • Approaches • Pure bundling • Mixed bundling • Supplier and consumer benefits • Reduced churn, single bill

9. Effects of bundling Pure bundling Mixed bundling

10. Competitive positions • Telcos lack video delivery • Joint marketing with DBS • Cable lacks mobile presence • Joint ventures with mobile • Wireless, BPL, new entrants lack key assets, competencies

11. Suppliers of bundles • IXCs and ILECs (local, LD) • Rural LECs triple play pioneers • Major ILECs and cable MSOs • Some bundling by energy companies (public power)

12. Case 1: Qwest Prices for Nebraska as of November 15, 2005

13. Case 2: SBC Communications Prices for Michigan as of October 1, 2005

14. Case 3: Comcast Prices for Michigan as of October 1, 2005

15. Pricing of bundles • Promotional bundles • Offer significant savings • Typically expire after one year • Regular bundles • Relatively low savings • Mixed bundling prevalent

16. Diversification • Carriers with network constraints • Mobile carriers, power utilities • New entrants • Google, Yahoo, Microsoft • Skype, Nintendo • Effective competitors

17. Sprint Nextel Vision Multimedia • Radio and TV services • 20 SIRIUS Mobile radio channels • On-demand radio (e.g., NPR) • CNN, Fox, Weather Channel, GoTV • Streaming radio (Rhapsody) • Comic strips, games

18. Mergers and alliances • Active or defensive strategy • Significant mergers • SBC + AT&T = the new AT&T • Verizon + MCI • Cingular + AT&T Wireless • Sprint + Nextel

19. U.S. mobile market structure Source: FCC (1998-2003); *2005 estimated

20. Alliances

21. Overall assessment • Complicated patterns of industry transformation • Two principal types • Convergence economics • Integration and disintegration

22. Synthesis • Convergence strategies • Bundling • Diversification • Alliances and mergers • Competitive impacts?