Who wants unbundling?

Citation

Curwen, P. (2005), "Who wants unbundling?", info, Vol. 7 No. 4. https://doi.org/10.1108/info.2005.27207daf.001

Who wants unbundling?

Who wants unbundling?

A regular column on the information industries

There have certainly been cases in recent years of telecommunications executives bringing down their companies through misguided strategies, but just occasionally a glimmer of sympathy for their lot permeates a commentator’s suspicious mindset. Could it be, one wonders, that they were doing their best to devise rational medium-term strategies in an environment that demanded only short-term solutions? It is of interest to examine this issue in the context of so-called “bundling” – meaning in this case the simultaneous supply of all or most of fixed-wire, mobile, internet and cable services.

The purpose of liberalization was, as the term signifies, to permit new entrants into markets previously dominated by incumbents. Although the latter were not necessarily monopolists in the sense of single-sellers, monopoly was more widespread than is commonly imagined because competition was often more of an illusion than a reality. Hence, for example, the UK cable market started out with over one hundred licensees, yet each in practice had a monopoly over an uneconomically small area, while on a grander scale the Baby Bells in the USA had a virtual stranglehold over their local regions.

Initially, feeling threatened by legislation seemingly designed to hurt them financially, incumbents in both Europe and the USA responded by doing everything in their power – in particular, by fighting regulators’ adverse rulings to the bitter end – to prevent entry into their markets while simultaneously using their economic muscle to break into markets controlled by other operators. Staying bundled up was clearly advantageous in that respect since if, say, a mobile market was threatened by a new entrant, the cash flows emanating from less competitive sectors could be used to cross-subsidize or special prices could be offered to customers willing to take a bundle of services from the same operator. In the USA, the main battleground involved the long-distance operators such as AT&T and the Baby Bells, all now permitted to enter each others’ markets under specified circumstances under the terms of the 1996 Act yet all more intent upon defensive rather than offensive strategies.

In retrospect, it can be argued that there was only one way truly to resolve this impasse, namely for regulatory bodies to stand up and announce something to the effect of “markets should determine industry structures, not regulators, especially when the internet is turning many preconceptions about service delivery upside down, so we’ll come back and rewrite the rulebook in five years’ time”. Needless to say, they did precisely the opposite, arguing that competition without regulation would not work. That this happened in Europe is unsurprising given the hugely influential position of the European Commission in relation to the member states, but is harder to understand in the USA given its more visceral preference for market solutions. Nevertheless, the Federal Communications Commission chose to interfere on a heroic scale, treating each segment of the market – mobile, cable, internet or whatever – as an entity unto itself, worthy of its own detailed set of regulations designed to ensure that they became competitive.

It is somewhat ironic that what put paid to bundling, at least for a period during the early years of the millennium, was the impact of market forces in the form of the stock market collapse of 2000/01. Under pressure to restore shattered balance sheets, many bundled operators felt obliged to un-bundle, typically hiving off all or part of their mobile and/or internet subsidiaries which on a stand-alone basis were rated more highly by the financial markets – the so-called conglomerate discount. Un-bundling was widely applauded in the financial markets. Inadvertently, this also appeared finally to cut through the Gordian Knot of entry-preventing strategic behaviour since fixed-wire parents could no longer necessarily dictate the strategies of mobile subsidiaries and so forth, but it also revealed a very awkward reality, namely that it wasn’t what customers wanted.

If there is one irrevocable truth about the telecommunications industry, it is that its evolution waits for no man. In particular, the supply of, and demand for, networks capable of shifting previously unthinkable amounts of data had arrived in something of a rush, and since virtually all communications, including most voice telephony, came in bits and bytes, they simply got shoved together down the fibre-optic pipe, tagged with their addresses, and put back into the right order at the other end if need be. What customers wanted was to send all of their data down the smallest number of pipes possible, which meant, in effect, that they wanted to deal with the minimum number of service providers for fixed-wire, mobile, Internet, cable and any other relevant services such as television.

This has hit un-bundled organisations particularly hard. Take, for example, BT which had hived off mmO₂ only to discover that a mobile presence would be welcome to its customers, or AT&T, which had given up on local access via cable and now also found itself stranded as a long-distance operator and ultimately the subject of a takeover bid. For these operators, and others like them, the solution can no longer be along the lines of “buy the bits that are missing” due to the cost, but in any event there is a much better way, namely to lease the missing bits as and when needed to create a “virtual” bundled operator. For incumbents that had hived off only minority stakes in their subsidiaries there is, at least, the option of a repurchase operation. Thus, we have recently seen France Télécom repurchase the free float in mobile subsidiary Orange and make an offer to purchase the outstanding shares in Equant, while Telecom Italia has successfully repurchased most of the free float in mobile subsidiary TIM. But it goes without saying that this behaviour creates massive tensions within the regulatory systems whose raison d’être is to a significant extent to prevent bundled operators from exercising market power. Can they really stand aside and let open competition between bundles become the norm even though bundling is by definition a multi-market phenomenon? Can they, for example (since it is topical) allow operators to trade spectrum, allowing those who believe that they can make the highest return from it to collect a disproportionate amount even though this may shut out new entrants?

A particular focus of bundling is currently upon the integration of fixed-wire and mobile networks, as illustrated by the behaviour of the operators cited above. In effect, the objective is to provide a single handset that works like a cellphone away from the office and home but which will reconfigure itself as a standard phone within the office/home (a process sometimes referred to as “convergence”). An example is the (much delayed) “Bluephone” project linking the BT Group (bereft of mmO₂) with Vodafone. Similar schemes are in hand by bundled operators that can avoid the potential conflicts generated by such joint ventures.

While regulators are unlikely to be amused by such potentially anti-competitive developments, the irony is that they are in many ways a response to the pressures of competition. The onset of “triple-play” by the likes of cable operators combined with the ability of telcos to provide streaming video and TV means that the standard regulatory model that slices the industry into finite segments no longer makes sense. The companies themselves are fully aware of this, but cannot readily second-guess the regulatory response. At the end of the day, therefore, it is evident that a rapidly changing environment and conflicting views about the joys or otherwise of un-bundling, combined with a slow-moving regulatory system, have made strategic decision making something of a lottery for CEOs, so perhaps after all they are deserving of rather more sympathy than generally comes their way.

Peter CurwenVisiting Professor of Telecommunications, Strathclyde Business School, Glasgow, UK. E-mail: pjcurwen@hotmail.com