1. Bundling, Differentiation, Alliances, and Mergers Johannes M. Bauer Michigan State University First Transatlantic Telecom Industry Forum Montpellier, November 22, 2005

2. 2 Agenda n Convergence n Bundling n Differentiation n Alliances and mergers n Synthesis

3. 3 Morphology of convergence n Technological convergence n Markets: convergence in substitutes and complements n Organization, ownership n Regulatory convergence

4. 4 Convergence triggers n General purpose technology n Policy changes l Telecom Act of 1996 l RBOC entry into long distance l Reduced unbundling obligations l DSL declared information service n Corporate strategy

5. 5 Convergence and divergence n Integrating forces l Telecom+computing=telematics l Telematics+media=multimedia l Fixed+mobile+Internet n Disintegrating forces l Specialization, differentiation

6. 6 Convergence, competition, strategy n Convergence in substitutes l Intensifies competition n Convergence in complements l Reduces intensity of competition

7. 7 Convergence economics n Critical tension l High sunk costs l Commodification n Strategic responses l Bundling, differentiation l Alliances, integration, mergers

8. 8 Bundling n Stabilization of willingness to pay n Creation of entry barriers n Approaches l Pure bundling l Mixed bundling n Supplier and consumer benefits l Reduced churn, single bill

9. 9 Effects of bundling C1C2C3 Service A1007030 Service B6070120 Bundle160140150 C1C2C3 Service A1008030 Service B10100140 Bundle110180170 Pure bundling Mixed bundling

10. 10 Competitive positions n Telcos lack video delivery l Joint marketing with DBS n Cable lacks mobile presence l Joint ventures with mobile n Wireless, BPL, new entrants lack key assets, competencies

11. 11 Suppliers of bundles n IXCs and ILECs (local, LD) n Rural LECs triple play pioneers n Major ILECs and cable MSOs n Some bundling by energy companies (public power)

12. 12 Case 1: Qwest Options#1#2#3#4 LocalXXXX Long distanceX DSLXX DirecTVX WirelessX Regular$45.99$70.98$122.97$65.98 Bundled intro$40.99$45.98$92.97$60.98 Bundled regular$40.99$65.98$112.97$60.98 Prices for Nebraska as of November 15, 2005

13. 13 Case 2: SBC Communications Options#1#2#3#4 LocalXXXX Long distanceXXXX DSLXX DISH Network WirelessXX Savings/monthUp to $2.96 Up to $3.00 Up to $5.00 Up to $11.00 Prices for Michigan as of October 1, 2005

14. 14 Case 3: Comcast Options#1#2#3#4 LocalXXX Long distanceXXX InternetXXX Digital cableXXX Wireless Savings/month$10.00 $15.00 Prices for Michigan as of October 1, 2005

15. 15 Pricing of bundles n Promotional bundles l Offer significant savings l Typically expire after one year n Regular bundles l Relatively low savings n Mixed bundling prevalent

16. 16 Diversification n Carriers with network constraints l Mobile carriers, power utilities n New entrants l Google, Yahoo, Microsoft l Skype, Nintendo n Effective competitors

17. 17 Sprint Nextel Vision Multimedia n Radio and TV services n 20 SIRIUS Mobile radio channels n On-demand radio (e.g., NPR) n CNN, Fox, Weather Channel, GoTV n Streaming radio (Rhapsody) n Comic strips, games

18. 18 Mergers and alliances n Active or defensive strategy n Significant mergers l SBC + AT&T = the new AT&T l Verizon + MCI l Cingular + AT&T Wireless l Sprint + Nextel

19. 19 U.S. mobile market structure Source: FCC (1998-2003); *2005 estimated

20. 20 Alliances ParticipantsPurpose SBC − Yahoo; Verizon − Yahoo; Bell South − Yahoo Co-branding of Internet access SBC − EchoStar; Verizon −DirecTV; Bell South−DirecTV Sale of satellite broadcasting service Sprint Nextel PCS − Real Networks; Sprint Nextel PCS − SIRIUS; Verizon − MSN Mobile broadcasting and streaming content Comcast, Time Warner Cable, Cox Communications, Advance/Newhouse Quadruple play services, next generation mobile multi-media services

21. 21 Overall assessment n Complicated patterns of industry transformation n Two principal types n Convergence economics n Integration and disintegration

22. 22 Synthesis n Convergence strategies l Bundling l Diversification l Alliances and mergers n Competitive impacts?