Bundling in Telecommunications – Provider Incentives

This is the first of three articles on the Fair Trading Commission’s series on bundling in the telecommunications sector.

We live in a global village where individuals are constantly faced with various challenges associated with communicating with others far removed from their immediate environs; the telecommunications (‘telecoms’) sector has evolved to resolve these and other challenges.

Types of Bundling

Over the years, the telecoms sector worldwide has evolved with telecoms operators expanding from offering services such as phone or Internet individually to offering packaged or bundled services where phone and Internet services are provided jointly. This practice of bundling services has a significant impact on the current consumption of telecoms services in comparison to twenty years ago. Bundling describes the sale of two or more individual products in a single package or bundle. Bundling may occur in any of three ways: pure bundling, mixed bundling, and tying. Pure bundling is where telecoms operators offer subscribers only the packaged services and subscribers are unable to purchase the individual products separately. Mixed bundling is where telecoms providers offer a bundle, but consumers may alternatively purchase any individual services included in the package. Tying occurs when a telecoms operator makes the supply of one service (the tying good) conditional on subscribers agreeing to also purchase another service (the tied good).

Bundling in the Telecoms Sector in Jamaica

Bundling in the telecoms industry is more popularly marketed as “triple-play” and, to a lesser extent, “quad-play.” Triple-play, as the name suggests, is the bundling of three telecoms services- usually, subscriber television (cable TV), Internet, and landline telephone services. For quad-play, four services are bundled by adding mobile voice services to the triple-play bundle.

Both telecoms providers in Jamaica offer triple-play bundles, which include broadband Internet, cable TV, and telephone. As at the end of April 2020, one telecoms provider offered three bundles to residential customers with channel lineups ranging from a low of 160 channels to a high of 250 channels; Internet download speeds ranging from a low of 60 Mbps to a high of 150 Mbps; and unlimited local calls. The same company also offered a bundle of two products: broadband Internet and telephone. In addition to the bundles, the company also provided stand-alone Internet, voice, and cable TV.

Similarly, at the end of April 2020, the other telecoms provider offered three bundles to residential customers with the channel lineups ranging from a low of 85 channels to a high of 222 channels; Internet download speed ranging from a low of 50 Mbps to a high of 100 Mbps; unlimited on-net calls; and cross-network calls ranging between 100 and 1,000 minutes. As it relates to stand-alone services, the company supplied Internet plans, with a note that ‘TV and home phone plans available as an add-on.’ The provider does not supply stand-alone landline telephone service.

Based on the types of bundling identified, both companies engage in mixed bundling with one of them also engaged in tying. But in what ways do telecoms operators benefit from bundling their services to subscribers?

Incentives for Telecoms Operators to Offer Bundles

Bundling allows telecoms providers to operating more efficiently by lowering their operating costs. Bundling can generate cost advantages in areas such as marketing, invoicing, and supply.

Regarding marketing, a provider can advertise and promote its products/services to all consumers in one approach, rather than separate promotions tailored to consumers in multiple approaches. With invoicing, providers can generate one invoice that covers a bundle of three products rather than three invoices for individual products.

As it relates to supply, bundling allows telecoms operators to produce and provide multiple products to consumers using a single supply channel. In economics, this principle is referred to as economies of scope. Economies of scope exist when it is cheaper to produce two products together than to produce them separately. For example, fiber-to-home technology allows telecoms operators to provide cable TV, fixed-line voice, and high-speed Internet on a single platform. Bundling may also allow telecoms operators to exploit economies of scale. Economies of scale refer to the phenomenon where the average costs of production decrease as output increases. Therefore, there is a decrease in the cost to produce each bundled package when a provider is producing more bundles arising from an increase in the subscription rate.

Bundling also allows telecoms operators to increase the demand for their services by effectively lowering the aggregate price of the services included in the bundle. The price of a bundle is typically less than the sum of the prices of the individual items included in the bundle. For instance, at the end of April 2020, one telecoms provider offered a bundled package comprising Internet and Cable TV services for $6,000 monthly. If subscribers accessed both these services outside of the bundle, they would have had to spend at least $6,600 monthly. Bundling, therefore, allows some subscribers to access services they would not have otherwise been able to afford. Through price discrimination, therefore, bundling allows telecoms operators to extract additional surplus without lowering prices too much.

Bundling in Telecommunications – Provider Incentives