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No.63 - Bundling Competition in ICT Industries

Communications & Strategies - 30/09/2006 No.63 - Bundling Competition in ICT Industries

3rd Quarter 2006

Bundling strategy analysis has become a major topic of Industrial Organisation research over the past twenty years. Bundling refers to the practice of marketing a package of at least two more or less distinct services, in set proportions. Our goal in choosing this topic for the latest issue of C&S was to take stock of recent developments on the bundling issue in economic literature, drawing on analysis of concrete situations that the ICT sector's leading players are now encountering.


Dossier

Bundling Competition in ICT Industries

Edited by Edmond BARANES & Gilles LE BLANC

Bundling Strategies in ICT Sector: an Introduction
Edmond BARANES & Gilles LE BLANC

Bundles and Range Strategies: The Case of Telecom Operators
Sophie PERNET

Optimal Bundle of Multimedia Services in Emerging Mobile Markets
ChanGi NAM, SeongCheol KIM, DeockHee CHO & HyeongJik LEE

Triple Play Time
Claude CRAMPES & Abraham HOLLANDER

Service Bundling and the Role of Access Charge in the Broadband Internet Service Market
Sunghee SHIM & Jungsuk OH

Interviews with
Stefano MANNONI
, Commissioner of the AGCOM
Jacques CHAMPEAUX, Executive Vice President, Regulatory Affairs, France Telecom

Other papers

Overlay Networks and the Future of the Internet
Dave CLARK, Bill LEHR, Steve BAUER, Peyman FARATIN, Rahul SAMI & John WROCLAWSKI

Financial Assessment of Citywide Wi-Fi / WiMAX Deployment
Vinoth GUNASEKARAN & Fotios HARMANTZIS

Features

Regulation and Competition
• Harmonizing Spectrum Policy in the EU - The WAPECS Concept
  Rajen AKALU

• Unbundling in Europe: Recent Trends
  Sophie BISMUT

Firms and Markets
• Internet giants vs. Telcos - Opportunities & threats
  Vincent BONNEAU

• Is Online Music Locked in by Leveraging?
  François LÉVÊQUE

Use Logics
• Estimating Future Demand for Wireless Mobile Communications
  Carlos RODRÍGUEZ CASAL & Jean-Claude BURGELMAN

Book Review
• Olivier BOMSEL, Anne-Gaëlle GEFFROY & Gilles LE BLANC, When internet meets entertainment
  by Rémy LE CHAMPION

• Xavier GREFFE (Ed.), Création et diversité au miroir des industries culturelles
  by Alain VALLEE

• Michel SALOFF-COSTE, Carine DARTIGUEPEYROU & Wilfrid RAFFARD, Le dirigeant du troisième millénaire
  by Bruno LANVIN

Sophie PERNET
Bundles and Range Strategies: The Case of Telecom Operators
Key words: Bundle, range strategy, triple play, quadruple play.

Against a background of competition and the generalisation of IP that characterises the field of electronic communications, the concept of the "bundle" has resulted in the emergence of "triple play", and even "quadruple play." This paper offers an overview of the growth of this phenomenon by introducing a distinction between the basic components of multiplay strategies and the diverse range of functions that can be linked to these strategies.


ChanGi NAM, SeongCheol KIM, DeockHee CHO & HyeongJik LEE
Optimal Bundle of Multimedia Services in Emerging Mobile Markets
Key words: telecommunications and broadcasting convergence, emerging service, 4G Technology, T-DMB, S-DMB, WiBro, HSDPA, telematics, customer preference.

Although various emerging technologies have been launched, they present limitations as far as offering full-scale ubiquitous services independently is concerned. In view of this fact, service providers are likely to provide bundled services among possible combinations of services. Indeed, making a timely decision regarding the value maximization of bundled service is directly related to service providers' future growth and success in the turbulent market environment. This paper aims to find the optimal service bundle among five emerging mobile services: T-DMB, S-DMB, WiBro, HSDPA, and Telematics. Considering what kinds of service features among the five emerging services offer differentiation to customers, we examine four attributes (TV, voice, portable wireless internet, and location-based services) using conjoint analysis to distinguish the service features. Our results show that TV service is the most favored among the attributes, followed by voice service in second position, and the internet and location-based service in third and fourth place respectively. Our result implies that mobile operators would be better off bundling HSDPA and S-DMB first, and then adding other services later, while fixed operators would be better off bundling WiBro and S-DMB first and other services later.


Claude CRAMPES & Abraham HOLLANDER
Triple Play Time
Key words: triple play, bundling, digital convergence, broadband access, television and telephone

Digital convergence thrusts telephony, television and the internet into the so-called 'triple play' offerings, creating new forms of rivalry between cable operators and telephone companies. Markets participants feel compelled to enter new industries to survive, even though their core competencies are limited to their primary market. The outcome of triple play competition is likely to depend on the speed of the development of new technologies and the adaptation of the regulatory environment. In the short run, telephone companies will enjoy an advantage attributable to switching costs. However, this advantage will erode as younger subscribers switch to telephony on the internet.


Sunghee SHIM & Jungsuk OH
Service Bundling and the Role of Access Charge in the Broadband Internet Service Market

Key words: cable TV; broadband internet service; bundling; access charge; convergence.

Using the classical Hotelling model, this paper analyzes the incentive for a CATV service provider to bundle broadband internet services when entering the broadband internet services market. In addition, the effect of such service bundling by an entrant on the market incumbent with ownership over existing bottleneck facilities is analyzed. Furthermore, an access charge that maximizes social welfare is explored and determined. Two cases are considered: in the first case, the market is fully covered; and in the second case, the market is not fully covered. With full market coverage, an entrant has an incentive for service bundling if there is sufficient service differentiation. The entrant's bundling strategy reduces the incumbent's profit. In this case, the total social welfare is independent of the level of the access charge and only has an effect of redistributing the net surplus between consumers and the incumbent. With partial market coverage, the entrant has an incentive for service bundling at a low access charge. The incumbent's profit increases if the access charge is higher than the cost of access provisioning. In this case, the total social welfare is dependent on the level of access charge and the welfare maximizing access charge is less than the unit cost of providing access.


Dave CLARK, Bill LEHR, Steve BAUER, Peyman FARATIN, Rahul SAMI & John WROCLAWSKI
Overlay Networks and the Future of the Internet
Key words: internet architecture, overlay networks, ISPs, internet policy. 

In recent years, we have seen the emergence of numerous types of so-called "overlay" networks in the internet. There are many diverse examples of such overlay networks including the content-delivery-caching networks, implemented by companies like Akamai, the peer-to-peer file sharing networks associated with applications such as BitTorrent, the voice-over-IP services offered via Skype, and various testbed networks such as PlanetLab. Such overlays have important technological and policy implications for the evolution of next generation internet architecture. This paper provides a first attempt to understand the implications of such overlays for internet architecture, industry structure, and policy. We introduce a taxonomy for thinking about these overlays with some examples of their scale and growing importance in the internet, and suggest some preliminary thoughts on the implications of these overlays for industry structure and policy.


Vinoth GUNASEKARAN & Fotios HARMANTZIS
Financial Assessment of Citywide
Wi-Fi / WiMAX Deployment

Key words: Wi-Fi, WiMAX, VoWi-Fi, 2.5G/3G

There are several ways by which a Wireless Internet Service Provider (WISP) can deliver city wide wireless broadband services. However, it is necessary to determine a profitable business case and at the same time a cost-effective service model, which is affordable to all types of users and different classes of society. This paper proposes a service model (both data and voice) that uses two emerging wireless technologies (Wi-Fi and WiMAX) to deliver cost-effective broadband services. Wi-Fi / WiMAX have not only the potential to compete on a cost-per-megabyte basis with cable and Digital Subscriber Line (DSL), but also make ubiquitous broadband a reality. If engineering and economics are correctly applied, a Wi-Fi network can be built around an entire city with a WiMAX backhaul, instead of providing limited coverage for hotspots. On the other hand, internet telephony over a Wi-Fi network is the public access version of Voice over Internet Protocol (VoIP): users can enjoy the handiness of a cell phone-like service, while avoiding the cost of traditional cellular carriers. This paper focuses on the techno-economic modelling of Wi-Fi hot zones into a WiMAX infrastructure mesh while addressing Voice over Wi-Fi (VoWi-Fi) issues. Our study demonstrates that low-cost broadband services can be offered, while remaining economically advantageous for service providers


 



 

Rejen AKALU is currently a research associate at the Center for Information Communications Technologies at Denmark Technical University. He is currently conducting research on the topic of spectrum management under the direction of Professor William Melody, Managing Director of Learning initiatives for the reform of network economies (www.lirne.net) and the World Dialogue on the Regulation for Network Economies (www.regulateonline.org).

Edmond BARANES is Professor of Economic Sciences at the University of Montpellier and IDATE's Scientific Consultant. He is the Editor for the COMMUNICATIONS & STRATEGIES journal and represents IDATE within academic networks. He holds a Ph.D. in Economic Sciences and a Master of Economics (University of Paris I Panthéon-Sorbonne, 1991). He received a Post graduate diploma (DEA) in Mathematical Economy and Econometrics (1991) and a Master of Econometrics I (1990) from University of Paris.
edmond.baranes@univ-montp1.fr



Steven BAUER is completing his Ph.D. in computer science at MIT and is working in the Advanced Network Architecture Group with David Clark. Bauer's research focuses on the architectures and economics of internet-scale networks. Bauer is the recipient of the Department of Defense National Science and Engineering Fellowship and the National Science Foundation Fellowship. He is also a Harry S. Truman Scholar and Barry Goldwater Scholar.

Sophie BISMUT is a telecom analyst at IDATE, working on regulatory issues and market trends in the telecommunications sector. She is in particular in charge of two annual publications : Telecoms in Europe and The World Telecommunications Services Market.
s.bismut@idate.org



Vincent BONNEAU joined IDATE in 2004 as a Senior Consultant in the Marketing and Forecasting Department. He is mainly in charge of the impact of the software industry on the telecom markets. Prior to IDATE, Vincent Bonneau worked for the French Trade Commission (Economic Department of the Embassy of France) in San Francisco as an analyst in charge of the software industry. He has also worked for marketing departments at several telecommunication companies including Noos (French leading cable operator), Wanadoo and France Telecom. He graduated from Ecole Polytechnique (1997) and from Ecole Nationale Supérieure des Télécommunications (2002). He also holds a MS from HEC in IT Management (2002).
v.bonneau@idate.org



Jean-Claude BURGELMAN is head of the ICT unit at the Directorate General Joint Research Centre of the European Commission. He holds degrees in social sciences (Ph.D., 1986) and in science and technology policy (MA, 1991) from the Free University of Brussels. He teaches a course on the "Global aspects of the information society" at the Free University of Brussels (VUB) where he was full professor of communication technology policy. His main research interests and activities focus on the social and economic impact of information society technologies. He has authored or co-authored 11 books on these topics. J.C. Burgelman sits on the board of several important scientific journals in the field of IST policy (COMMUNICATION & STRATEGIES, Telematics and Informatics, Media, Culture and Society, etc.) and is a member of the scientific board of CPR, the Communication Policy Research Conference and the ITS 2006 conference (the International Telecommunications Society).

Jacques CHAMPEAUX was named Executive Vice President of the Regulatory Affairs division of France Telecom in April 2004. Prior to taking up this appointment, Jacques Champeaux held a number of senior management positions in the France Telecom group including Executive Vice-President, Large Business Division from 1996 to 2002 and chairman of the Supervisory Board of EQUANT from June 2001 until the end 2002. Jacques Champeaux first joined France Telecom in 1971 and has gathered experience in many areas of the telecom business over the course of his career. He is a graduate of the Ecole polytechnique and the Ecole nationale supérieure des telecommunications.

DeockHee CHO received a B.A. degree in English Language and Literature from SungKyunKwan University, Korea, in 1996. He is currently a graduate student in the School of IT Business at ICU. His research interests include the areas of system engineering, IT management, technology strategy and M-commerce.

David CLARK is a senior research scientist at the MIT Computer Science and Artificial Intelligence Laboratory, where he has worked since receiving his Ph.D. there in 1973. Since the mid 1970s, Dr. Clark has been leading the development of the internet; from 1981-1989 he acted as Chief Protocol Architect in this development, and chaired the Internet Activities Board. His more recent activities include extensions to the internet to support real-time traffic, pricing and related economic issues, and policy issues surrounding the internet, such as broadband local loop deployment. His current research looks at re-definition of the architectural underpinnings of the internet, and the relation of technology and architecture to economic, societal and policy considerations. Dr. Clark is past chairman of the Computer Science and Telecommunications Board of the National Academies, and has contributed to a number of studies on the societal and policy impact of computer communications. He is co-director of the MIT Communications Futures Program, a project for industry collaboration and coordination along the communications value chain.

Claude CRAMPES is professor of economics at Toulouse University and a member of the Institut d'Economie Industrielle (IDEI). His research fields are the economics of intangible assets and networks. He has done a lot of work on electricity, water distribution and cable TV. He has also contributed to the economics of innovation processes and intellectual property. C. Crampes has jointly published with A. Hollander in Economica, Information Economics and Policy, European Economic Review, and Journal of Regulatory Economics.

Peyman FARATIN is a research scientist at MIT Computer Science and Artificial Intelligence Laboratory. He received his Ph.D. in Distributed Artificial Intelligence, developing algorithms and incentive mechanisms of electronic market institutions for online provisioning and allocation problems in IP access networks and distributed supply chains domains. He has also been involved in the engineering and institutional design of intelligent systems for the provisioning of wireless access networks and IP network management. More recently he has been working on building economic models for policy goals, focusing on the complex strategic interactions between the technologies, economies and industrial organization of internet economies involving transport service, content and application providers, economies characterized by high sunk (investment) costs, close to zero marginal cost and high fixed costs.

For more than fifteen years, Yves GASSOT has been at the head of IDATE (www.idate.org), an institute that has established itself as one of the leading research centres in Europe concerned with the telecommunications, Internet and media industries. In this position, he has taken part in numerous studies of the various markets and the strategies being pursued in the telecommunications sector. He is on the panel of several expert committees, including the Conseil Général des Technologies de l'Information and the Advisory Committee of the PTC, he is special adviser of the European Commissioner of the Information Society, he serves as director of the journal COMMUNICATIONS & STRATEGIES and is scientific head of the annual International Conference of IDATE. With a background as DPLG architect, he is a graduate of the Institute of Political Studies, Paris (3rd Cycle).

Vinoth GUNASEKARAN is a Ph.D. Student in telecommunications management, at the School of Technology Management, Stevens Institute of Technology, NJ, USA. He holds a Master’s degree in telecommunications from the University of Louisiana, LA, USA. His current research focuses on emerging wireless networks, including technologies, strategies, businesses and socio-economics. In 2004, he was a summer intern at the Mobile Networking Research group in AT&T Labs, NJ, USA. While in India, he worked in information technology and e-commerce related businesses.

Fotios HARMANTZIS is assistant professor at the School of Technology Management, Stevens Institute of Technology. His research interests include quantitative investments under uncertainty, valuation of real options, risk management, and the economics and financial aspects of high-tech and telecom. He teaches courses in financial engineering and telecommunications management programs.

Abraham HOLLANDER obtained his Ph.D. in economics from the University of Minnesota. The primary focus of his research is competition policy and international trade policy. His most recent work relates to competition in audio-visual markets, parallel trade and the licensing of intellectual property. He currently holds the position of professor of economics at the University of Montreal. A. Hollander has jointly published with C. Crampes in Economica, Information Economics and Policy, European Economic Review, and Journal of Regulatory Economics.

SeongCheol KIM received a M.B.A. degree from Seoul National University, as well as a M.A. and Ph.D. in telecommunications from Michigan State University. He is currently an associate professor of MIS and e-business in the School of IT Business at ICU. Before joining ICU, he led e-government initiatives for the Seoul Metropolitan Government as information systems director. His research interests include e-government, M-commerce, and telecommunications management.

Bruno LANVIN is the World Bank’s Senior Advisor for questions related to the information society. He is also the regional coordinator for the information technology policy programme (CITPO) for Europe and Central Asia and is the co-founder and joint head of the World Bank’s "E-Leadership" programme. He previously managed the World Bank’s "Information for Development" (infoDev) programme (2001-2003) and was the Executive Secretary of the DOT Force (Digital Opportunity Task Force) of the G-8 (2000-2001). Prior to taking this position, he led the electronic commerce programme of UNCTAD (United Nations Conference for Trade and Development) in Geneva, and occupied various high-level positions within the United Nations, both in New York and in Geneva. Bruno Lanvin has authored and co-authored several publications, articles and works, including Building Confidence: electronic commerce and development (CNUCED, January 2000) and the Global Information Technology Report (INSEAD, The World Economic Forum, infoDev, 2003, 2004, 2005). He holds a B.A. in Mathematics-Physics, an MBA from HEC, and a Ph.D. in economics.

Gilles LE BLANC is professor of economics at the Ecole des Mines de Paris and director of CERNA, research center in industrial economics. His main research interests are the analysis of industrial and regulatory dynamics and the empirical implementation of market structure's theories. Recent work focuses on digital content economics, European industrial policy and the economic geography of R&D in global firms. He is co-author of When Internet meets Entertainment (Presses de l'Ecole des Mines, 2006), an essay on digital media industries. He graduated from Ecole Polytechnique and holds a Ph.D. in economics from the Ecole des Mines. In 1999-2001, he was visiting researcher at the London School of Economics.

Rémy LE CHAMPION is an associate professor at the University Paris II and a researcher at CARISM. He holds a Ph.D. in economics from the University Paris X, as well as a post-doctorate from Keio University in Tokyo, Japan. He was previously a visiting researcher at the Columbia Institute for Tele-Information in New York, USA, and headed the research department of the Conseil Supérieur de l’Audiovisuel in France. He currently works as an independent expert for the European Commission. His research interests include media economics and new media (TV, programming, LPTV, press). He is the author of numerous publications, and most recently Télévision de pénurie, télévision d’abondance, with Benoît Danard, La télévision sur Internet, with Michel Agnola.
remylc@noos.fr



HyeongJik LEE received a B.S. degree in Industrial management from KAIST in 2001, and a M.A. in IT business from ICU in 2003. He is currently a doctoral student in the School of IT Business at ICU. His research interests include emerging services analysis and spectrum management in the telecommunications industry.

William LEHR is a research associate in MIT's Computer Science and Artificial Intelligence Laboratory (CSAIL). Dr. Lehr is an economist whose specialty is the regulatory and industrial economics of the internet infrastructure industries. He participates in the MIT Communications Futures Program (http://cfp.mit.edu), where his current research focuses on the evolution of wireless networking, broadband internet access, and spectrum policy. Prior to joining MIT in 1996, Dr. Lehr was an assistant professor in the Graduate School of Business at Columbia University. In addition to his academic teaching and research, Dr. Lehr provides business strategy and litigation consulting services to public and private sector clients in the USA and abroad. He holds a Ph.D. in Economics from Stanford (1992), an MBA from the Wharton Graduate School (1985), and MSE (1984), BS (1979) and BA (1979) degrees from the University of Pennsylvania.
wlehr@mit.edu



François LÉVÊQUE is professor of economics at the Ecole des Mines de Paris and visiting professor at the University of California at Berkeley. He is also a director at Cerna, the research centre of the Ecole des Mines in industrial economics. François Lévêque has published several books on antitrust economics, as well as the economics of regulation and intellectual property rights. He is the author of around 50 articles on these topics. He has been regularly commissioned by the French government, OECD and the European Commission as a consultant and participates in advisory committees. He is the founder of Microeconomix, a Paris-based unit specialising in the economic analysis of legal disputes and a member of the French Environment Accounting Commission and the Council on Intellectual Property.

Stefano MANNONI is a tenured professor of law at the University of Florence. He is also an attorney and was elected commissioner of the AGCOM by the Senate in March 2005.

ChanGi NAM received a B.S. degree in management from Seoul National University in 1978, and a Ph.D. in business administration (finance) from Georgia State University in 1988. He worked for the Korean Information Society and Development Institute from 1988 to 2000. He is currently a professor in the School of IT Business at ICU. His research interests include financial analysis and performance evaluation in the information and communications industry.

Jungsuk OH is an assistant professor at the Graduate School of Information & Media Management, KAIST. His major research interests cover telecom, digital and media economics. More specifically, his recent research addresses issues of revenue/cost/profit allocation in the aforementioned industries, as well as the pricing of IT outsourcing services. He graduated from MIT (SB, 1994), studied Operations Research at Stanford University (MS, 1995) and received a Ph.D. in Management Science & Engineering from Stanford University (2003). He also worked as a senior researcher at TriGem Computer, Inc. between 1997 and 2003, where he initiated and performed a number of strategy and IT infrastructure projects.

Sophie PERNET joined IDATE as a senior consultant in 2000 and specializes in the consumer market. She is in charge of the Use IT survey on ICT uses in the French consumer market. This survey is an in-depth study of telecom demand among French households, as well as arbitration between internet, TV and telephony services (based on a poll of 1,000 interviews). Sophie Pernet has carried out several studies dealing with services over broadband, and especially bundles, covering worldwide benchmarking and development opportunities. She also specialises in market modelling and forecasts.
s.pernet@idate.org



Carlos RODRÍGUEZ CASAL works as evaluation officer at the Directorate General Information Society and Media of the European Commission. His major research interests include the strategic planning of ICT policy and development effectiveness. Before taking up his position at the Commission, he was an associate professor at the State University of Navarra. Dr. Rodriguez holds a Ph.D. in mobile communications (1998), a masters in electronic engineering (1994), a masters in law (2000) and an MBA in business (2002).
carlos.rodriguez@cec.eu.int



Rahul SAMI is an assistant professor at the University of Michigan School of Information. He received his Ph.D. in Computer Science from Yale University in 2003, and spent two years as a postdoctoral assistant at the MIT Computer Science and Artificial Intelligence Laboratory. His research focuses on designing and analyzing incentive mechanisms, markets and reputation systems to enable self-interested parties to cooperatively solve common goals, especially in internet protocols and applications.

Sung Hee SHIM has been a doctoral student at the School of Economics, Seoul National University 2004 since 2004. His main research interests focus on bundling and platform competition in the IT industry utilizing an industrial organization approach. Before Seoul National University, he studied at the Graduate School of Management, KAIST (MS, 2004) and the School of Economics, Seoul National University (BA, 1997).

Alain VALLÉE is currently senior vice-president research at the content division of France Telecom. He began his carrer in the 1980s as a professor at the Institut National des Télécommunications and Ecole Nationale Supérieure des Télécommunications. He was also an expert for the European Commission’s "Analysis and forecasting group", working on the Green Paper and telecommunications directives, and chaired the "Study Group of the European regulators committee". In 1990, he joined the Direction de la Règlementation Générale, in the French Ministry for Post and Telecommunications, and directly participated in the preparation of the new telecommunications law adopted in December 1990 and its subsequent implementation. In 1996, he moved to Mobistar in Belgium where he was appointed Institutional relations director. In 1997, Alain Vallée became strategic planning and regulation director for France Telecom Mobile, and subsequently worked for the Orange Group in various positions. He holds a Ph.D. management sciences.

John WROCLAWSKI is director of the Computer Networks division at the University of Southern California's Information Sciences Institute, with responsibility for the strategic direction of this 45-member research group. ISI's Computer Networks Division maintains active programs of research in areas such as internet protocols and architecture, sensor nets, network and distributed system security, and space systems networking. Prior to joining ISI, Mr. Wroclawski held positions as research scientist with the Advanced Network Architecture Group at MIT's Computer Science and Artificial Intelligence Laboratory and with MIT's program on internet and telecommunications convergence. His technical interests include the architecture, technology and protocols of large, decentralized communication systems such as the internet, systems aspects of pervasive computing, and the core principles of self-organizing systems. Mr. Wroclawski is a member of the ACM, IEEE and the IETF, and has recently served on the executive committee of ACM SIGCOMM, as editor of ACM Computer Communications Review, and as a member of the IETF's Transport Area directorate.



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