bundling of content access coleago v001 061015 sz

Is bundling of content and access a sustainable strategy?OTT/Digital content strategy seminar 2015

Stefan ZehleCEO, Coleago Consulting LtdTel: +44 7974 [email protected] www.coleago.com

Stefan Zehle, CEO, Coleago Consulting Ltd

Expertise: Strategy, marketing planning, market forecasting, business planning Involved in the telecommunications industry for 30 years with experience covering

both fixed and wireless technologies. Two years operational experience as Director of Marketing, Strategy and

Regulatory Affairs in Algeria with budgetary responsibility for $46 million of revenue and $29 million of cost.

Lead over 50 mobile licence bids and spectrum auctions in Asia, Europe, Africa, Australia, New Zealand and the Americas.

Delivers “Best Practice in Spectrum Assignment” workshops for the GSMA, the European Commission and regulators around the world.

Co-author of “The Economist’s Guide to Business Planning”, Over 40 published papers and conference appearances. MBA with distinction from University of Westminster, London

© copyright Coleago 2015Is bundling of content and access a sustainable strategy?

1

Coleago Consulting – A specialist consulting firm serving the needs of the telecoms, media, technology sectors


2

Strategy & Business Planning

Telecoms Regulation & Interconnect

Business Transformation & Cost Reduction

Transaction Services

Spectrum Valuation, Auctions & Licence Applications

Strategy Development, Marketing Strategy

MVNO and Multi-Brand Wholesale Strategy

Business Planning and Business Modelling

Improving Customer Care

Spectrum Strategy Spectrum Valuation for Auctions

Spectrum Auction Bid Strategy and Execution

Licence Applications

Commercial Due Diligence

Technical Due Diligence

Cost Reduction Mobile Network Sharing

Restructuring and Turnaround

Accounting Sepa-ration & Regulatory Price Control

Interconnect Cost Modelling, Agreements and RIO

Regulatory Consultations and Lobbying

Regulatory Strategy

Tower Due DiligencePreparation of Information Memorandum

Mobile Network Sharing

Mobile Network Sharing Network Audit Tower Due Diligence Managed Services

and Outsourcing

Network Audit and Improving Network Performance

Exclusive content can transform a commodity access services into a highly differentiated product

Lesson 101 of the marketing text book: If you can equip an otherwise

undifferentiated product or service with some unique feature or selling point, this gives you the ability to either charge a higher price or gain greater market share.


3

Rely on price to attract customers

Commodity

Unique Feature

As viewer habits are moving away from linear TV, digital content provides an opportunity for fixed and mobile broadband operators


4

Fixed and mobile operators have leapt at the opportunity with bundled offers and TV anywhere apps

Some broadband operators build a strategy around exclusive content ….


5

The view as to the value of exclusive content appear to differ between players in the same market

EE TV is a set-top box (STB) based service available to the UK operator’s mobile and broadband subscribers.

In contrast to rivals such as BT, which has spent billions on sports rights, EE has not invested in content.

“We strongly believe that the UK has the best [free TV] content proposition in the world...other content is also provided by OTT players. So we don’t really see a role for exclusive content. … We think that the customer experience that we are going to give and the functionality that [EE TV] has got is strong enough on its own.”Pippa Dunn, EE’s Chief Marketing Officer, said:


6

…. while others do not see exclusive content as the main ingredient

In the US an increasing number of consumers are keep to separate content from access

An increasing number of US households stop their cable TV subscription and buy high speed internet access only.

They then subscribe to services such as Netflix or Hulu, stream movies and shows from the Apple store or Amazon Prime or watch YouTube.

HBO and other premium entertainment networks are also starting to go OTT, thus bypassing the cable TV network.


7

What is the view of the King of Content?

“Content is not just king, it is the emperor of all things electronic”

Rupert Murdoch, Newscorp Earnings call, 3 February 2010


8

Prices paid for content rights appear to indicate that for some operators the value of exclusivity is substantial

The competition between Sky and BT for sports rights has grown increasingly fierce

England’s Premier League sold its soccer TV rights for $7.8 billion (£5.136 billion) to Sky and BT. The deal will run for three years from 2016.

Sky paid $64 billion (£4.2 billion) for five of the seven TV packages while BT paid $1.46 billion (£960 million) for the other two. – This is a 71% increase from its last

rights auction, also won by Sky and BT.

– Sky paid 83% more than it did in the last round three years ago.


9

While content can leverage an access business, telecoms and content economics are not aligned

Digital content economicsThere are very large economies of scale in content acquisition and distribution: The cost of production does not vary

with the number of viewers The marginal cost of serving an

additional viewer is very small Making content available to the

maximum number of viewers creates the greatest value

Telecoms operator economics While telecoms networks are

dominated by fixed costs and capacity utilisation drive profitability, higher broadband traffic drives incremental capex.

Much of the incremental investment in network and spectrum is driven by building mobile broadband capacity.

Therefore for mobile operators there is a stronger link between traffic and network capex and opex.


10

The value of bundled content to telecoms seem to outweigh the “cost” of a smaller audience for a given item of content

The ability to extract leverage value for exclusive content by bundling it with access is a rational business decisions. There are two broad ways an integrated carrier could use bundling to reduce

rivals’ sales:– by setting prices such that consumers are encouraged to purchase the bundle

rather than individual products – this can be done by setting the bundle price either below the aggregated price of individual products or insufficiently above the aggregated price to account for any added value consumers obtain from bundling; or

– by providing the product for which it has market power only within the bundled package, thus “capturing” sales of the product for which the carrier faces competition – this is referred to as “tying”.Anticompetitive Bundling Strategies, A Report for the Australian Competition and Consumer Commission, Prepared by NERA, January 2003, Sydney


11

While “exclusivity” generally attracts the attention of regulators the case against bundling is not a foregone conclusion

“Exclusivity” generally attracts the attention of regulatorsHowever, there are a number of tests that must be satisfied that before an regulator would act to stop unbundling, for example: The non-competitive product (exclusive

content) must be important for competition in the competitive access market?

Does the bundler have significant market power?

Can an equivalent be obtained elsewhere? Do consumers benefit or are they harmed? Is there predation and is competition

harmed?© copyright Coleago 2015

Is bundling of content and access a sustainable strategy?12

The Open Internet rules in the US are far-reaching and potentially problematic for a bundling strategy

Adopted on February 26, 2015, the FCC's Open Internet rules are designed to protect free expression and innovation on the Internet and promote investment in the nation's broadband networks

Bright Line Rules: No Blocking: broadband providers may not

block access to legal content, applications, services, or non-harmful devices.

No Throttling: broadband providers may not impair or degrade lawful Internet traffic on the basis of content, applications, services, or non-harmful devices.

No Paid Prioritization: broadband providers may not favor some lawful Internet traffic over other lawful traffic in exchange for consideration of any kind - in other words, no "fast lanes." This rule also bans ISPs from prioritizing content and services of their affiliates.


13

Network nepotism: Is there a threat to competitive markets in content

When a broadband carrier, such as Verizon, offers a commercial prioritization service,10 it offers a unique service over the last-mile connection that only it controls. This termination monopoly not only gives carriers the power to favor selected content but also allows them to monopolize other markets for content delivery. Thus, the introduction of this new option gives carriers a new tool with which to discriminate against potential competitors and may make the existing markets for content delivery less competitive over the long term, with potentially significant effects for the economics and innovation at the center of the Internet.

Network nepotism and the market for content delivery, Tejas N. Narechania, Stanford Law Review Online Vol. 67:27, August 6, 2014


14

Could zero-rating be considered a violation of net neutrality?

Does BT TV count towards my broadband usage guidelines?No, BT TV doesn't count towards broadband usage.This means you can watch as much On Demand entertainment as you want on your BT Vision+ box or from the BT Player on YouView, without going over your broadband usage guidelines.

Regulators have taken different positions on zero rating. In Canada, Chile, Norway, the

Netherlands and Slovenia, regulators have made explicit statements against zero-rating as anti-competitive or contravening national net neutrality regulation.

In other countries the practice exists among various operators in different forms and regulators have not taken action.OECD Digital Economy Outlook 2015, page 71


15

The net neutrality debate is hotting up and creates risks for bundling content and access

"All data must be transmitted under the same conditions …. that's the idea behind net neutrality and that is what we are maintaining now.“ACM board member Henk Don

In January 2015, Vodafone Netherlands was fined for breaching Netherlands' net neutrality law Vodafone introduced an app from

cable network HBO, usage of which did not count against a customer's data allowance.

Under Dutch law, ISPs are not permitted to charge different access rates for specific online services.

For breaching the rules, ACM fined Vodafone €200,000.


16

Zero rating mobile broadband traffic for content is problematic from a wholesale pricing view point

Mobile network operators who do not charge for certain content may come under fire not only from a net neutrality perspective but also from a wholesale pricing perspective.

MVNOs may not be able to compete an on the same basis due to margin squeeze, unless they also benefit from zero rating of traffic.

In the light of increased consolidation at network level, MVNO access is an increasingly important element in maintaining competition in mobile markets.


17

Content provides started to fret over access to consumers, what action will they take?

Blocking and counter blocking Can network operators succeed to

make it sufficiently unattractive from a cost to consume perspective?

The battle for consumer leads to other forms of blocking:


18

Amazon will stop selling Google and Apple streaming devices at the end of the month. 1st of October 2015

How will the debate evolve and what rule making will ensue as telecoms operators become broadcasters?

Deutsche Telekom, BT in the UK, Orange France and other operators now offer TV with their internet access products.

Mobile operators are looking to introduce LTE broadcast (eMBMS - Multimedia Broadcast Multicast Services) to stream some TV channels.

If telecoms operators start to a look a bit like broadcasters or cable TV companies, then will cable TV or broadcast rules apply such as:– “Must carry” obligation– Local content– Advertising rules


19

How will regulators react if consumers cannot obtain unbundled access?

How will regulators react if consumers cannot obtain unbundled access from a dominant operator?– Will they oblige operators to have an equivalent unbundled offer?


20

UK consumers cannot buy broadband access from BT without “free” BT sports. Of course BT

recovers its costs, so “free” is a misnomer.

The Digital Single Market Strategy for Europe is opening a can of worms for bundling of content and access

The Commission will make legislative proposals in the first half of 2016 to end unjustified geo-blocking. Action could include targeted change to the e-Commerce framework4 and the framework set out by Article 20 of the Services Directive.

The Commission is also launching a Competition Sector Inquiry focusing on the application of competition law in the e-commerce area.

The Commission will make legislative proposals before the end of 2015 to reduce the differences between national copyright regimes and allow for wider online access to works by users across the EU, including through further harmonisation measures.


21

Conclusions

Bundling content and access can deliver significant commercial benefits to fixed and mobile broadband network operators.

The risk of regulatory intervention increases the more commercially successful a strategy of bundling exclusive content with access is.

Bundling strategies, particularly those that involve exclusive content, may not be sustainable in the long term due to regulatory action.


22

Questions

bundling of content access coleago v001 061015 sz

Technology