Bundling may trump unbundling

Vodafone may have to do deals with ISPs to battle Telecom's converged offerings. Picture / Herald on Sunday

With all the talk of unbundling the local loop, bundling is becoming every bit as hot a topic.

The concept for telecommunications companies is nothing new. A $10 discount, for example, on the cost of a broadband connection if the customer's tolls are with the same provider is commonplace.

It's no surprise then, that in an increasingly converging world such bundles will inevitably become more common.

"Consumers generally like the idea of combined services on one bill, especially if there are better prices as a result," said TelstraClear spokesman Mathew Bolland. "It's a combination of what's compelling for the customer and good for us - there's a reduced cost in bundling."

In fact, the broadband-tolls bundle is such an effective incentive that Maxnet, the country's seventh largest internet service provider, has been forced to wave the $10 even though it doesn't offer tolls.

"Cross-subsidies and discounts means selling residential DSL [digital subscriber lines] is break-even at best," says managing director Brett Herkt.

Nevertheless, Herkt accepts that bundling is a logical option.

Bolland agrees: "In Wellington we offer telephone, internet and TV [together]. It goes down very well. The more offers and more variety you've got, the more customers have an option."

But therein lies a potential threat. If Telecom offers a discount on broadband with tolls, ISPs can do the same. What happens, however, if mobile is thrown into the bundling mix?

As the country's only full service provider - offering home phone, mobile and broadband products - Telecom holds a significant advantage in a bundled world.

Indeed, last month, the incumbent launched its Freedom plan. The package allows home phone customers to call one mobile number, and vice versa, as much as they like for $10 - but the customer can only get Freedom if their tolls are with Telecom, which are already inextricably linked with broadband.

Without a mobile component to their armoury, Telecom's broadband rivals currently have little or no comeback against such a move - and there's more to come.

"Our customers can expect to see more and more offers like this as we explore which bundled offers will appeal to customers - both business and consumer," says Kevin Bowler, general manager of Telecom Mobile.

If $10 off a broadband connection is attractive, what might the impact be if Telecom decided to offer a further $10 discount to customers who were also mobile subscribers?

"It would obviously put us at a disadvantage," says ihug chief executive Mark Rushworth. "Research from iiNet, our parent in Australia, shows that bundling does reduce churn. It makes the customer stickier and, therefore, harder to move.

"As people move to mobility, this sort of bundling will become increasingly important."

It's not just ISPs feeling the squeeze. Vodafone, too, is vulnerable to full-service bundling.

Mobile calling prices are currently no match for fixed lines. The company's 3G broadband service will offer speeds up to 3.6 megabits come September, but DSL connections are there already, 7 megabits is coming very soon, and Telecom's rollout of ADSL2+ is promising capabilities approaching 24 megabits by the end of the year.

The coverage of the 3G network is also far more limited than DSL, and for the $49 Vodafone charges per gigabyte of data downloaded, Xtra Broadband Explorer, for example, offers five times as much.

So what are its rivals going to do to combat Telecom's advantage?

Maxnet is talking about bundling broadband access with hosting, while ihug is looking at some sort of phone service bundling. But they have little room to manoeuvre - their only defence against a mobile bundle seems to be in offering a counter-service.

One way would be the introduction of Mobile Virtual Network Operator (MVNO) agreements, a wholesale deal where the ISP sells airtime as its own branded mobile services.

Ihug would be keen to find a suitable MVNO agreement.

"It's something we need to be talking about," ihug's Rushworth says. "We have spoken to Vodafone at a wholesale level, but no higher."

The concept is already well established in parts of Europe, the US, Australia and the UK, where MVNOs such as Virgin Mobile account for 10 per cent of mobile subscribers.

"We are very open to the idea of entering sensible and mutually beneficial MVNO agreements," says Vodafone New Zealand's external communications manager Tracey Palmer. The company would not comment further on any such discussions.

Another approach for Vodafone would be to find some way to combine - or in industry parlance converge - the best of services traditionally seen as either fixed-line or mobile.

Vodafone does have a precedent of going it alone. Last October, its parent company introduced Zuhause in Germany. The service, which includes wireless broadband, allows customers to designate a 2km radius around their home where calls from the cellphone are billed at a landline rate, with normal mobile pricing applying outside.

In New Zealand, Vodafone appears to be getting ready to offer a similar service by applying to the Commerce Commission for a ruling on interconnection charges with Telecom. But the company is committed to any service remaining a mobile-only one.

"We don't believe that you need fixed capabilities to effectively meet customer needs," says Palmer. "Our plans aren't driven by the need to protect traditional technologies and revenue streams, and bundling is one way fixed operators doing this."

Some sort of pooling of fixed and mobile resources, however, is an option ISPs are keener to explore.

Maxnet is definitely interested.

"As time goes on, we see convergence happening and people having one phone - running off DSL at home and connecting back to mobile off cellular when out of range of home wireless network," Herkt says. "At some point in the not too distant future we'll have to talk about bundling mobile."

An example of how this could work is British Telecom's Fusion. The Fusion handset works like a normal cellphone except at the subscriber's home where, instead of linking to the mobile network, it connects to a wireless hub, which is plugged into a broadband connection.

"Three to four years down the track I expect to see the Fusion model play out with ihug," Rushworth says. "Although we don't want to get ahead of ourselves - for now the focus is on [unbundling]."

Unbundling should present opportunities for innovation and creativity in the broadband space independent of what Telecom is doing, but most observers agree it will take time to set up the system. Even TelstraClear's wholesale unbundled bitstream service (UBS) deal with Telecom, which was signed in January, is taking months to materialise.

"There's a fair bit going on behind the scenes," Bolland says. "It'll be in the market before too long."

If, on the other hand, the focus shifts too much toward bundled services, the irony is that it could stop the local loop unbundling process in its tracks. While the regulated UBS agreement does offer some protection against discounting as it works on a retail minus mechanism, unbundling offers no such safeguards.

"Really, it's going to depend on what happens to the price," Rushworth says. "The unbundled price is benchmarked with comparative countries and long-term incremental costs. If the UBS price is driven too low compared to [unbundling] it will discourage investment."

Bundling the local loop

Telecommunications providers in the United States could increase monthly customer spending by US$58 ($94) between now and 2010 by adding more bundled services, according to industry analysts Parks Associates. Nearly one-third of US broadband subscribers surveyed said they were interested in bundled TV-related services.