Bundling of content access coleago v001 061015 sz

Is bundling of content and
access a sustainable strategy?
OTT/Digital content strategy seminar 2015
Stefan Zehle
CEO, Coleago Consulting Ltd
Tel: +44 7974 356258
stefan.zehle@coleago.com
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 2015
Is 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 Diligence
Preparation 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 economics
There 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
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While “exclusivity” generally attracts the attention of regulators the
case against bundling is not a foregone conclusion
“Exclusivity” generally attracts the
attention of regulators
However, 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?
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.
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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
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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
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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.
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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.
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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:
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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
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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?
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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.
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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.
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