Reference no: EM13826609

Problem-

Bundles of joy

"In 2007 your telephone company, and its rivals, will offer you the world in a bundle", Nov 16th 2006 I from The World In 2007 print edition
What is going on in the telecoms industry? The frenzy of mergers and takeovers in 2006 showed that the industry has bounced back after the spectacular crash of 2001. AT&T re-emerged as the world's largest telecoms firm; Alcatel merged with Lucent to form a giant equipment-maker; and Nokia and Siemens combined their network-equipment divisions in response. Softbank bought Vodafone's Japanese unit; in Europe, Telefonlca bought 02. All of these deals were motivated by a single trend that has become the industry's new mantra: convergence.
Industry bigwigs speak of convergence in a quasi-mystical way that evokes information nirvana. "It is a question of convenience, enriching people's lives, because we can provide communications, information and entertainment the way they want it," says Mark Wegleitner of Verizon, an American telecoms giant. "We want to bring simplicity to our customers, the first step towards digital paradise!" exclaims Didier Lombard of France Telecom. In fact, convergence is simply the result of the telecoms industry's embrace of internet technology, which provides a cheaper, more efficient way to run networks. The internet's encoding system, which divides everything into "packets" of data, can be used to carry phone conversations, text and photo messages, video calls and television channels side by side on a single, high-speed network. As a result, firms that used to be in separate industries-telephone operators, internet service providers and cable-TV companies-have all suddenly found themselves in the same business.

Cable companies now offer broadband internet and voice services over networks that used to carry just television; telecoms firms have responded by upgrading their networks to carry television signals; and internet service providers have branched out into telephone and video services. In the new converged world, any firm that can deliver high-speed data to customers over its network can offer any or all of these services. And offering all of them together in a bundle is thought to be a winning strategy. The ultimate bundle is called the "quadruple play"¬ the combination of fixed and mobile telephony, broadband internet access and multichannel television. If your telephone company and a host of rivals are not already offering you such a bundle, you can be sure that they will start to do so in 2007.

It sounds like a good deal. For a single monthly fee, you can buy all your communications and entertainment services from one company, and receive one bill. The companies offering such bundles offer discounts if you buy all four services together, and they are devising all kinds of new "converged" services that link them up. So you can make extremely low-cost, or even free, phone calls via your broadband connection. You can have a "converged" mobile handset that functions as a mobile phone outdoors, but allows calls cheaply via your landline when you return home. Your television will summon films and televisionprogrammes as and when you want them. Further ahead, you will be able to make calls on your television and use your mobile phone to program your set-top box to record a particular programme.

Not everyone is convinced, however. Many consumers say they prefer to buy these services from different companies, even when offered a discount. But the industry is pushing ahead with convergence and bundling anyway, for its own purposes.

Now that they are all in competition with each other, telecoms firms, cable operators and internet service providers are desperate to hold on to their customers. Telecoms firms regard convergence as the best defence against the collapse in revenue from traditional phone calls, the price of which is heading inexorably downwards, and the migration of more and more traffic to mobile networks. Cable operators hope that offering bundles including very cheap telephone calls will prevent customers defecting to the telecoms firms' television services. And internet service providers have realised that offering broadband access on its own is no longer enough: they must offer telephony and television too if they are to survive.

There are cost savings to be had by replacing many separate networks with a single, converged one. It also enables operators to launch new services more quickly, making them more competitive. Selling the whole quadruple-play bundle under a single brand, as AT&T is doing in America, and Orange is doing in Europe, saves money on marketing, advertising and customer acquisition. And once customers have signed up for a bundle of services and its associated discounts, they are less likely to be lured away by another firm. No wonder the industry is so beguiled by convergence.

The trouble is that everyone is doing it-and, by definition, not everybody can be more competitive, more agile, and better able to attract new customers and retain existing ones. Having grown during the television 1990s with the introduction of internet access and mobile phones, household spending on communications and entertainment in the developed world is now flat, so the coming fight between converged operators of various kinds is really just a fight over the allocation of existing spending; nobody seems to be offering anything terribly new that will increase the overall size of the pie. Convergence is both a response to and a reflection of far greater competitive pressure in the telecoms industry. That is bad news for the companies involved, not all of which will survive. But greater competition, more choice and lower prices should be good news for consumers-whether or not they decide to sign up for a service bundle.

Tom Stand age: business editor, The Economist from The World In 2007.

Additional Information-

This article belongs to economics is about the telecom industry during the year 2006-2007. It explores the then situation of telecommunications. Telecom service providers, cable operators and internet service providers, all of them seemed to be converging or moving toward digitalized services. As more and more services were being offered, some services were priced high while others were priced low. The rest of the article explains every aspect mentioned in the case study.

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