Who’s Afraid of the Big Bad Bundle?

Published May 1, 2006

Recent reports suggest that “bundling” multiple communications services has not emerged as the “killer app” for attracting or retaining customers. Only a small percentage of subscribers buy bundled services, and many eventually abandon their bundles. Very few customers have expressed interest in relying on one company to satisfy all of their communications needs, no matter how diverse companies’ offerings become.

So much for the notion that mergers and the bundling capabilities of Internet Protocol will transform cable and telephone companies immediately into invincible competitors deserving of regulation.

But the idea that the competitive power of bundles–if it ever manifests–may do so only in the future provides another reason why policymakers should be reluctant to regulate service bundles.

Given that offering standard communications services in bundles (i.e., pricing together services that had been priced separately) has provoked only lukewarm enthusiasm among consumers, providers will need to find new ways of combining these services if they are to persuade consumers that the whole of a bundle is more valuable than the sum of its parts. Examples could include bundles that help consumers communicate or use video and other content across services in the manner they increasingly demand: whenever and wherever they want it.

Companies will need to engage in experimentation unfettered by regulators’ attempts to address speculation regarding the incentive and ability of “bundlers” to harm competition or consumers. And this freedom to experiment should extend to network owners. Some ways of innovating across service bundles may require new forms of network management. Further, the suite of complementary services that some large network operators own could enable them to realize technical and economic efficiencies that would be difficult, if not impossible, to realize through joint ventures or other contractual arrangements among entirely separate companies.

Thus, regulators should hold off regulating service bundles not just because (as in the network neutrality context) there is little evidence of consumer harm. Regulators also should avoid intervening at this time because, if they did intervene, they might inadvertently discourage innovation–innovation that is necessary to prevent service bundling from becoming just another aspect of digital age communications that did not turn out quite like many expected.

Kyle Dixon ([email protected]) is senior fellow and director of the Federal Institute for Regulatory Law and Economics at the Progress & Freedom Foundation.