Economics News Article Review

Question

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 television programmes 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.


Summary

This article from 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.

Total word count is 496

 

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