Bundling Services Is a Good Thing

Cable, Internet, iPods and new technology don't need more regulation

It is high time to confront the regulatory anomaly plaguing the telecommunications, PC, software and broadband applications markets.

In virtually every other business, “bundling,” the packaging of two or more products or services that a vendor derives from a single underlying set of materials, is an accepted, even welcome, way of doing business.

The neighborhood barber keeps a stock of clippers, razors, shave cream and emoluments that can be applied in different combinations to cut hair, shave beards or provide a manicure.

Certainly, one can imagine three entrepreneurs in side-by-side storefronts, each with the same stock of tonsorial supplies, yet each offering a grooming service individually. The reason we don’t see this in practice is that it’s more cost-effective — and beneficial for the consumer – if one business provides grooming services in a bundle, Once set up to cut hair, the incremental cost of adding a shave and manicure is so small that significant savings can be passed along to a customer who opts to buy all from one barber, rather than go from shop to shop. The idea is engraved in our collective consciousness in the old rhythmic, “shave and a haircut, two bits.”

Yet regulators and self-styled consumer advocates are doing their best to prevent the broadband industry from doing the same thing.

Groups such as Consumer Federation of America oppose the recently proposed AT&T-BellSouth merger, like they have other carrier consolidations in the past, out of fear that such deals will reduce competition and choice in long distance service.

The calls in Congress to impose “network neutrality,” which would prohibit broadband carriers from charging content providers who access their networks, stem from worries that carriers will bundle voice, data and video offerings and provide preferable terms to their own services or those of business partners.

Meanwhile, French lawmakers have passed a bill demanding that Apple uncouple its iTunes music service from its iPod platform and allow songs from iTunes to be downloaded to non-Apple MP3 players.

At the root of all three complaints is belief that the ability to combine once-separate equipment, services and applications will inevitably lead to monopoly. Yet that argument is purely speculative. No one has pointed to a specific instance where broadband or information technology service bundling has led to consumer harm or market exploitation. Quite the contrary, the trend toward service consolidation and bundling has been marked by decreasing prices, greater consumer choices and free flow of venture capital, precisely the opposite of what occurs in a market controlled by a cartel.

Every time one company or another figures out a way to package a group of broadband services in a new way, there is a spike in consumer interest and market activity.

For example, within six months of introducing video services over a broadband fiber opticnetwork in northern Texas, Verizon garnered a 25 percent market share in some communities. Vonage, founded in 2003, today has more than 1.5 million customers for its Voice over the Internet Protocol (VoIP) service, which combines local and long distance in a single low-price package. Not only has Apple’s iPod and iTunes packaging done more to stimulate the legitimate market for downloadable music, it has opened a new channel for video programming.

Bundling is a market mechanism where vendors attempt to create the best value from underlying resources by inventing economical packages that are convenient to use. Broadband networks call on a far greater number of elements—switches, routers, bandwidth, software, content and applications-than their narrowband predecessors. Regulations and policies that force companies to isolate these services in the name of preserving competition are detrimental to the growth of broadband. They make as much sense as forcing one barber to only cut hair and other to solely offer shaves and another to focus on nails. Sure, you’ll have more providers, but their businesses will each be less profitable, while at the same time consumers will pay more for services. Value is diminished all around.

That’s why we have a competitive market of thriving full service barber shops. All indicators show that’s what we need in telecom and broadband. Consumers like the packages they get now from companies like Vonage, Apple and Verizon. They’ll get much more in both choice and value if regulators and consumer groups resist the urge to tamper with the market by prohibiting bundling.

Steven Titch is a policy analyst at Reason Foundation. An archive of Titch’s work is here and Reason’s telecom policy research and commentary is here.