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Bundling and Pricing Innovation

This was initially posted on LinkedIn December 16, 2013.

Innovation comes in many forms. Many times innovation is thought of as technological improvement or as invention. We can all cite examples of inventions which turned into industries which re-defined civilization. The steam engine comes to mind but there were many others before and after. Inventing something is certainly a way to create value but it’s not as common or as reliable a method as it might seem. Creating Intellectual Property is one thing, finding a defensible market and business model is quite another.

More often companies innovate in terms of processes or the “algorithms” which are used to deploy existing resources. Wal*Mart was immensely innovative in the way it organized itself and laid out a low-cost business model. More recently Amazon has innovated in distribution and fulfillment based on the ability to dispense with showrooms for products and sell directly online. There is little in terms of technology which Amazon “invented”. Rather, it deployed off-the-shelf technology in a novel way.

But what I want to address is a more mundane sort of innovation: marketing innovation, specifically pricing. Few would consider a price model to be an innovation but in fact it’s a core lynchpin to many breakthrough innovations. It was pricing which permitted Henry Ford to build an industrial empire. He could have built cars for those who could afford them as cars were defined in 1907 but he chose to build a car around a price point which was around the median of the population. A car “so low in price that no man making a good salary will be unable to own one.” His business logic began with a price and the product and process followed.

Another aspect of pricing innovation is “bundling” where products which might sell poorly independent of each other sell very well when coupled with complements. Consider the original Microsoft Office. When introduced vis-a-vis Lotus 1-2-3 and WordPerfect as separate products, it handily won the market for spreadsheets and word processors. Bundling is also the way TV is sold. Cable companies don’t offer channels a-la-carte. It even took root in the car business. Automakers are now selling upgrades as “equipment packages”, a method proving far more popular (and profitable) than the menu system of old.

But there are cases where bundling has been rejected by users. iTunes broke the bundle of the “Album” where the only way you could get a single was to buy a dozen other songs. Once broken, the album bundle shows no signs of a come-back. Many are questioning whether TV channel bundling is also ripe for such a break-up.

And there is yet another looming bundle question. For as long as the market existed, mobile carriers sold their service bundled with a device. This harks back to the days when AT&T (known then as the Bell Network) did not permit users to own their own landline phone. They argued that the device is a part of the network and choice in the matter would compromise security and safety of a crucial infrastructure. The argument played well with regulators for decades.

This tie between the device and the service persists today but the connection has been preserved not though regulatory fiat but through incentives in pricing. Arguably, the low price of devices, and hence cost of entry, has meant that penetration skyrocketed. Cellular service now reached saturation in the US in near-record time. The upgrading to smartphones is now about 60% complete and looks to saturate a mere 8 years after reaching 10% of the population.

So in a way, the “innovation” of the carriers has been in bundling and creating a package that was irresistible to consumers. They went from not consuming mobile networks to consuming them universally. The amount being spent by consumers on mobile services is above $1.3 trillion world-wide–a market that did not even exist 20 years ago.

So now the question being asked, even within the industry, is whether this bundling can long last. The way I would answer the question is by following the logic from the consumer’s point of view. If the bundle is valuable, then it’s likely it will be tolerated, even preferred. In the case of software and car options the model works. Even in the case of TV the model is still preferred as few consumers are defecting to the IP-based unbundled alternatives. In the case of music, the consumers prefer the unbundling because there were things in the bundle which they did not need or want. They wanted a song, not a song and others which they might like.

But in the case of network service and device, the split is more subtle. A service is useless without a device and a device is useless without a service. The bundle makes sense from the point of view of co-dependency of modules. The broader question is one of choice. The premise of unbundling might be that users can choose service and devices separately and change them arbitrarily.

There is a fundamental problem with this however. A service that can be switched on or off easily by consumers is economically challenging for network operators. The economics of networks are such that financing them requires steady cash flow and every operator desires stability. So incentives will be put in place for consumers to stick around, and these incentives (read innovations) work. But isn’t the device itself such an incentive?

We end up back where we started. The business model and economics of operators world-wide is such that the device is a critical part of the incentive structure which preserves the network’s economic balance.

It may be an illusion, but a cheap phone (with a long-term contract) is a fundamental innovation devised by telco operators even before the phone became mobile. Operators have come to love it and no matter how many technology generations go by; how many family plans, bucket plans, weekend minutes, rollovers, and data packages; no matter how many tweaks and re-brands the model gets, it will persist. There simply isn’t sufficient win-win value in alternatives.

  • gprovida

    If this true, then why is there such disparity in bundled vs not bundled across the world, I s this regulatory or economic?

    • handleym

      In part this reflects the cost of enforcement.

      In the US, the average customer has a credit card, a well-known address, a stable life, a long paper trail. In other words, they don’t have much incentive to sign up for a subsidized phone and then bail (subsequently treating it as an iPod Touch, or getting some weird Chinese hack to unlock it, or whatever).
      An “iPod Touch 5S” for $200 is not a bad deal; change it to an “iPod Touch 4s” for $0 and it’s a GREAT deal.

      Go to a place like India or DRC or whatever and the incentives are very different. Now you sell your subsidized phone plus contract to some random person, they have every incentive to disappear and you’ll never see them again. Not to mention that they likely don’t have a credit card, and perhaps not even a street address to which regular mail is delivered, so you don’t have the basics necessary to even put a contract in place.

    • charly

      partly regulatory. Some countries forbid bundling or have a maximum of 6 months

  • Awax

    Check what Free (French 4th carrier and serial telecom disruptor) just “invented”.
    Last week was 4G as a free option in standard 3G plan. This morning, it is “renting” for 24 months a high-end smartphone instead of buying it with a subsidy.

  • Luis Alejandro Masanti

    Thanks for this repost. Please, do it with all your work.
    I’m just following this RSS.

    Thanks in advance.

  • http://www.isophist.com/ Emilio Orione

    Are all networks good enough?
    There differences in networks that make users prefer one over others, so their choice is not always free, they choose the best network service for their needs.
    Are all devices good enough?
    There is the iPhone and there are all the others. From this year the iPhone is on every major network, but roughly half of available operators has not the iPhone.
    There is constrain in the choice both of the device and the network that carries it.

    This introduces rigidity in the market and long term contracts fits well. It doesn’t matter if you are stuck with an operator for two year if this is the operator of choice in any case. The same reasoning for the phone model.
    If you cannot change why signing a long period contract should be a problem?

    In the future things can change, networks can improve to be equally available and equally fast, device can improve and the market become more fluid.
    I believe an operator offering unbundled solutions could become very attractive in a fluid market.
    In many nations this can happen today since networks are equivalent, only the iphone keeps the bundled model alive.

  • Primakovs

    I pay US$10 monthly fee for unlimited 3G data plan in Hong Kong. Why would I want to bundle it up with a phone purchase and pay much higher monthly fee as a subscriber?

    • http://www.asymco.com Horace Dediu

      I don’t know as I pay less for my service. Perhaps we should ask someone who does.

      • Michael Smith

        In geographically diverse markets like the US, network quality can vary a lot between the different providers. Bad experiences trying cheaper networks leads to loyalty to the more reliable ones.

      • dreamfeed

        To expand on this point, only two companies in the US have top-tier networks: verizon and AT&T. Two players generally don’t create real price competition price competition, it seems that three or four are needed. Since the US is huge geographically, the incumbents are protected by extremely high capital requirements.

      • Michael Smith

        Another counter-point is that MVNOs for AT&T and Verizon exist and offer cheaper pre-paid plans.
        However with my family plan, discount with AT&T through work, and habit of upgrading to a new iPhone every 2 years, the discount from going to a pre-paid plan isn’t worth the hastle unless I accept large restrictions on data usage.

    • dreamfeed

      Because your phone only works in one city, and mine works on almost an entire continent?

      • obarthelemy

        True also in Europe, with phones that work europe-wide.

  • Tatil_S

    Well, in the vase of landlines, cordless phones and answering machines were unbundled and the bundled business model never came back, but I suppose almost all customers had to stick around with their local telco despite buying those devices from others.

    Steady cash flow can be obtained through other means though. In Germany there are hundreds of MVNOS, many owned by one carrier and some by third parties. Many customers who switch from one virtual carrier to another due to price, convenience of refills, different data voice & text bundles or marketing schemes targeted to particular ethnic groups are actually staying with their actual carrier.

  • Glaurung-Quena

    “Even in the case of TV the model is still preferred as few consumers are defecting to the IP-based unbundled alternatives”

    I would absolutely not say “preferred” here. Car and software bundles may be seen as positive, money saving things by the people who buy them. However, TV bundles are widely despised, as are the cable companies that sell them.

    I’m not sure exactly why it is that I despise my cable company but am neutral towards my landline phone company, when both are large greedy monopoly corporations that massively overcharge for their services. But I suspect it has to do with the way the cable company forces me to buy things I don’t want,which makes my relationship with them feel abusive. I guess there’s a lesson there for the wireless carriers to learn as they use the smartphone revolution to extort more money from their customers.

    • rich

      Cable companies original promise was to deliver content without advertisements, which justified their cost over free broadcast televison. As time passed advertisements have worked their way into the content. So the original concept no longer exists. Price increases are often without an increase in service.

    • prefer

      It’s preferred because people pick it. Why would they pick it if they don’t prefer it?

    • dreamfeed

      Cable companies aren’t despised because of their content bundles – content bundles make a lot of sense. Cable companies are despised because the exploit their monopolies to offer an overpriced product with poor customer service.

      If it wasn’t for content bundles, you’d end up paying the exact same amount and getting less for your money (like, if it wasn’t for bundling, ESPN alone would be $40 a month or something).

      • handleym

        Of course if I don’t WANT ESPN that’s $40 of my cable bill that is going to them…

        That’s kinda the point. Feels abusive.

        You may be correct that, in the absence of bundling, prices would equilibrate to an average matching what people currently pay. But I think that’s a hypothesis, not a fact, and I think it’s probably a false hypothesis, given the costs of Hulu or Amazon.

      • dreamfeed

        No actually, right now it’s about $5 of your cable bill. Conservatively estimating that 20% of users would subscribe if it was a la carte, that means it would be $25/month in an unbundled world.

        Essentially the same math applies to every channel. For example take animal planet which adds about $.10 to your cable bill. I doubt more than 1% of subscribers would take it a la carte so they’d have to charge $10/month each.

        The average price per subscriber isn’t going to change because it is entirely determined by what people are willing to pay (since there isn’t any marginal cost). You’ve already shown that you are willing to pay $100/month (or whatever) for your TV, so no matter what happens the content producers aren’t going to leave that money on the table. Unbundling can only mean that you get less for your money. (Of course every pricing scheme will have its quirks, maybe you will somehow benefit from a la carte cable, but they’re not going to accept making less money on average.)

        Of course, in an unbundled world people might decide that they are no longer getting enough value to be willing to continue paying at the level, so average price might drop. But that is kind of a lose lose scenario.

        As for Hulu and Amazon: my prediction is that they are going to end up competing for exclusives so that to get the same content you get now with your cable package, you’ll have to subscribe to Hulu, Amazon, Netflix, and HBO, on top of your internet bill you end up paying about the same as you are now. Or maybe prices will just go up. But if you think that you’re somehow going to get the same content for cheaper, I would advise you not to hold your breath.

      • Kizedek

        I don’t think anyone, handleym included, is thinking that they would hpget same content for cheaper. They want to be able to get the content they actually watch cheaper, without paying for all the bundled content, however much of a “deal” that is.

        That might mean unbundling channels; but more significantly, it might mean unbundling individual programs and series.

        You can already purchase certain series and episodes on iTunes, but the tv industry hasn’t yet changed to the extent that the music industry has.

        Apple says they have “cracked” it, so perhaps they think they have a way that individual productions can be funded directly by those who want to watch it, so that more niche programming is viable without the middleman of the network in much the same way that more music is now produced without echoed labels.

      • dreamfeed

        By “the same content,” I mean the content you actually watch. In an unbundled world, you’d end up paying about the same as you do now, and getting only the content you really care about, rather than access to everything. It’s a lose/lose.

        http://www.theatlantic.com/business/archive/2013/07/how-watching-unbundled-espn-and-amc-could-cost-more-than-your-whole-cable-bill/277916/

      • Kizedek

        It may be a lose-lose in the way you can envision it right now. Which is why it hasn’t yet been “cracked”. It’s not a lose-lose if new, talented, interesting, niche content gets a chance of being produced as a result.

    • barryotoole

      Often, it is a matter of limits on choice. Where I reside – a small Midwestern town, Comcast is the only major player, along with a smaller regional player, and their prices are equally obnoxious. Not much competition.

      I’ve decided to ‘cut the cord’, so I spend $125/month on 50 Mbps Internet, and with $8/month each for Hulu and Netflix, with occasional purchase from iTunes via AppleTV, I get all TV entertainment I need. Friends with cable + internet pay same or more, although their speed is between 14-20 Mbps.

  • Michael Smith

    I’m not convinced TV is a story of unbundling. The most common alternatives people use to cable/satelite TV subscriptions (in the US) are Netflix, Hulu, and Amazon Prime. These aren’t unbundled, they’re bundles that provide better service at a lower price, with the trade-off of reduced selection. I only know one person who has no bundled subscriptions and just buys individual products or goes directly to each network.

    • dreamfeed

      Yes, unbundling makes no sense in the case of TV, music etc where the marginal cost of the product is 0. Imagine that there are ten people who each want a different piece of content. In the unbundled model, they all buy their chunk for a dollar, each content producer gets a dollar, and each consumer gets one piece of content. In the bundled model, they each buy a bundle of all the content, each producer still gets a dollar, but now the consumers have 9 other pieces of content which probably have a nonzero value to them.

      Of course in the real world it’s not that simple – the main variables being that not all content is equally valuable, and that consumer spending isn’t completely inelastic. But the value multiplier of the bundle is so huge that it will definitely win in the end.

      In music, it’s true that the album bundles were broken by downloadable singles, but what is happening now is the industry getting taken over by services like Spotify which bundle on a previously unimaginable scale.

    • sharrestom

      Netflix is almost entirely archived media; the exception being the few shows that they developed and provided in “binge” bundles, which is a new content delivery mode. I’m a fan of that.

      Amazon isn’t all that much different than Netflix, though Prime users get some free content.

      Cable bundles are a mix of live cable and network channels plus, primarily archived media channels (TBS), and premium content channels (HBO).

      Intermixed in that are niche and specialty channels.

      For myself, most channels don’t have content that interests me. However, I do enjoy many of the cable and premium channel series, miniseries and documentaries and would be willing to pay and do when available on the internet. I was able to watch the final episodes of “Breaking Bad’ via iTunes or Amazon this way.

      For cord cutters as myself, I prefer a more granular approach to media purchase than cable bundles and I find that more economic than cable.

  • Futurist

    It seems to me that disruption of the current bundling innovation could come from outside the carriers. Apple owns iPhone customers’ loyalty far more than the carriers do. So with Apple fitting more antennas in the same model, what if Apple bought up wholesale network space globally, became a virtual carrier and created the Super Sized Bundle of all Bundles allowing its customers to roam freely? Apple could bundle the phone and the service together in house and essentially subsidize itself if the carriers don’t want to.

    What I can’t understand is if the current bundling situation is in the carriers best interest for profit and customer retention, why is the AT&T CEO banging the drums about phasing out subsidies? Is it simply a reaction to T-Mobile’s Uncarrier campaign? In last place it’s a strategy that makes sense for T-Mobile but seems disastrous for AT&T. The subsidies and 2-year contract lock ins seem to be the only thing keeping the carriers from being turned in to the interchangeable dumb pipes that they should eventually be.

  • barryotoole

    Horace, you prove that no matter what AT&T’s CEO says about the near future where carriers won’t subsidize handsets, he’s just blowing hot air.

    However, if we look to a point where the US market is 80-90% saturated with smartphones, there will have to be a shift in business model of offering products and services by carriers.

    Apple is experimenting with a novel plan in India. You can trade-in old iPhones for credit towards the purchase of a new one. Also, there’s an interest-free financing model where after a modest down payment ($99/199), you can payoff the rest of the value in 12-18 monthly installments. IDK if both these can be combined.

    This is important in a country where handsets aren’t subsidized, and users buy unlocked phones which can use any SIM – sold separately, but the cost of an iPhone is relatively high.

    I believe Apple, and Samsung, MS, et al., may have to do the same in markets like the US, when it reaches near saturation. In a way, it will be good for consumers, for they’ll get ‘financing’ from manufacturers themselves, and carriers will have to compete on the pricing/services they offer.

    That is, if, the duopoly in the US wireless carrier market changes. Without that, there can be no disruption. As you say, phones need carriers.

  • handleym

    The carriers could compete, even in an unbundled (phone split from carrier) by actually providing a better bundle of services…

    As an example, consider what T-Mo are doing today. Land in a foreign country and, even without swapping SIMs or paying a massive data fee, you have access to basic data for maps, web, email. This is INCREDIBLY valuable, to at least some users.
    If ATT had any sense, they’d compete to offer a similarly valuable service. Instead they seem determined to push the customers for whom this is useful (who happen, also, to be the wealthiest customers) into the arms of T-Mo…

    Even if your job is simply providing data, there are still multiple ways to do this, sliced and diced by family plans, shared data across devices, shared data across borders, etc.

  • obarthelemy

    I don’t think iTunes invented Singles. I remember buying quite a few of those on vinyl in my youth. I’m not even sure they invented them in electronic format.

    If your wider reason about phones and data being inherently intertwined is true, how come:
    1- many countries are mostly un-bundled, and showing similar if not faster growth than the US
    2- increasignly so
    3- Desktops/Laptops/Tablets are not sold by ADSL providers. Not even a little.

    I’m not sure what value customers are supposed to see in bundling. It used to be that they needed a new device anyway, and an expensive one at that, so bundling made sense as an easy financing arrangement. Nowadays, new devices are often not required, and when they are, cheap (and good) options exist. Why commit to 2 yrs of an expensive contract when you can get a good $200 phone and a much cheaper contract ? There are plenty of examples of 1:1 relationships that don’t lead to bundling.

    Actual facts about what actually happens when the two systems compete, as in my country, show that unbundling takes off quickly. In France, the new unbundler entrant got from 0 to 15% share in about 2yrs, and unbundling in total rose to about 30%. Cheaper smartphone sales exploded alongside. Not bad for an alternative without “sufficient win-win”.

    • handleym

      No-one CLAIMED that “iTunes invented singles”.
      The claim was that “iTunes broke the concept of an album”.

      If you’ve ever bought a track from an eMusic store which is NOT the “hit” track from a particular album, you’ll appreciate the distinction in these claims.

    • http://twitter.com/LunaticSX Lun Esex

      “Why commit to 2 yrs of an expensive contract when you can get a good $200 phone and a much cheaper contract ?”

      Simple. Many people would prefer a much nicer $550-$750 phone, but they don’t want to pay the full price up front.

      Why do people want the nicer $550-$750 phones? Same answer as to the question “Why do some people buy BMWs when they could buy Hyundais instead?”

      A similar question would be “Why would anyone bother going to an expensive restaurant for a meal when they could just get their fill at a much cheaper fast food place?”

      If you have problems seeing why people would be interested in buying phones and computers, or cars, or food, on any basis other than just price, then perhaps you should read a different blog.

      • obarthelemy

        Indeed. Looking for most everywhere else, 12%.

      • charly

        People bought expensive phones because $200 phones were like Hyundai in the 90′s, crap. But know $200 are good enough and this really does change the market place

      • http://twitter.com/LunaticSX Lun Esex

        Clearly $200 phones are not the be-all and end-all considering how much demand there is for high-end, more expensive phones.

        The carriers know this, and they know if they don’t offer the higher end phones they lose customers.

      • mjw149

        The point that even Dediu recognizes is that the differentiation between those phones is not very great anymore, esp with Google making affordable phones available. For most people, a ‘nicer phone’ would be one tied to better services that works with more devices in their house – often that’s apple, but for many people it could be a $300 Nexus.

        There’s value outside the phone now. There’s enormous value outside the carrier network. The phone loans that the carriers make in the US are already on the wane.

      • http://twitter.com/LunaticSX Lun Esex

        “The phone loans that the carriers make in the US are already on the wane.”

        Except that they’re not. T-Mobile’s financing plans are virtually indistinguishable to the majority of their customers from the other major carriers’ offerings. This is clear from how the top three phones on T-Mobile are the exact same high-end models, in the same order, as on the other major U.S. networks.

        As for the comments from AT&T’s CEO about making changes to their “subsidized” model, there’s no evidence that those were anything more than saber rattling.

    • charly

      Some records have only be brought out as singles so i don’t see how Apple could have invented the download single especially considering that the legal download scene before itunes was uncontracted bands.

  • noone

    I think it’s interesting that ATT said what they said about device bundling, only after agreeing in principle to the FCC’s demand to unlock all phones upon contract completion. People have been casting it as shots at Apple and what not, but I see it more as parting shots at being ‘strong armed’ by regulators to actually do something nice for customers.

    Think about it. A new phone for a new contract bundle, helps lock customers in. A iPhone 5s, unlocked, will work with pretty much any provider in the US. So if they stop providing phone subsidies, they also stop providing me a reason to get a contract. That puts them into a deflationary market cycle where everyone is buying on price.

    Maybe they see that as their future anyway, so they’re making noise about it now. But I see this more as political manipulation than anything serious that will impact customers let alone handset OEMs. There is just no good business reason to do this, and if ATT does, they’ll finish the process that is already starting. The best thing that every happened to them was the exclusivity agreement for the iPhone. We’ll see if they remember that going forward.

    • charly

      The improvement delta for new phones is shrinking (natural behavior for new products) so the need for upgrade is felt less

      • mjw149

        Right, and this is the potential end of bundling. As phones run more and more of our lives, and last longer and do more, the migration pain becomes more costly than holding onto an old phone.

        As mobile replaces more of computing and hold more value, more of that value is outside the dumb phone network. Not just the data plan, which benefits the carriers, but the interaction with all our other devices, our broadband, our office work, our cars… The list is becoming endless. Make it a wallet and who will want to wait a day for an upgrade/migration just for a spec bump? Who wants to be at the mercy of the phone store and their wireless plan schedule for such a migration?

        So the carriers can maintain control with their hardware loans, but more and more there is so much value outside the phone but TIED to the phone (starting with itunes years ago) AND outside the carrier network that the loan for that hardware matters less and less.

      • charly

        I have’t even tough about migration cost with a new phone. Making that seamless, WITHOUT GOING TO THE CLOUD, would be killer.

      • clone

        It’s seamless in iTunes without going to the cloud. It would be nicer if they would just directly transfer using ad-hoc wireless though.

      • charly

        Wireless is to easy to bug. USB cable phone-2-phone is what is needed

      • clone

        If you’re that paranoid then you definitely shouldn’t be using a smartphone, with the constant network connection and innumerable sensors.

      • clone

        “As phones run more and more of our lives, and last longer and do more, the migration pain becomes more costly than holding onto an old phone.”

        Where is the migration pain? Press a couple of buttons and your new iPhone is a precise clone of the old one.

  • http://twitter.com/LunaticSX Lun Esex

    I recall a similar situation with music CD sales in the UK compared to the U.S.

    Before music downloads gutted the market for physical media sales there used to be a healthy market for CD singles in the UK. In the U.S. when music sales transitioned from LPs and tapes to CDs the music labels pushed the model of selling music only bundled as full albums. There were some CD singles in the U.S. too, but in general the labels did a bad job with their content and overpriced them at around 1/3 the cost of a full album, so they were not very popular with the public.

    The UK music labels greatly envied the bundled full album model of the U.S. music market. They’d more smoothly transitioned their single sales from vinyl and cassettes to cheap CD singles (around 1/8 the cost of an album), though, and the public was used to this and found it desirable. Additionally, music popularity charts in the UK were still weighted towards physical media sales, whereas in the U.S. they’d transitioned to sampling the frequency of song plays on the radio, similar to the Nielsen samples of viewers for television show ratings.

    Recent U.S. carrier talk of unbundling clearly has ulterior motives behind it, as it’s actually financially quite beneficial to them, like full album sales were to U.S. music labels. It may be that the carriers are worried about saturation and hope to get ahead of the ball for when price wars erupt. I would guess that this is saber rattling towards the phone manufacturers to try to get better deals, so that if a price war does occur the carriers don’t take as much of the brunt of it as they would under the current conditions. They’re also facing some loss of lock-in in the U.S. as network standards converge on LTE and they’re trying to make preemptive deals while facing federal scrutiny about phone unlocking.

    • charly

      Expensive smart phones are good for bundles so i don’t know if in the long run better deals (read cheaper phones) is good for operators

      • obarthelemy

        I’m not sure. If I’m a carrier selling bundles to customers with a budget, I’d rather be selling a bundle of expensive conract + cheap smartphone rather than expesinve smartphone + cheap contract, so that I get to keep most of the money.

      • charly

        But people react differently to a 2 year total $2700 including $650 phone than a $2100 including $150 phone. With the second they just see it as a more expensive Big pen they got when signing

      • obarthelemy

        Things is, currently contracts are all $2500, and with that you can get either a $750 pen for $199, or a $180 pen for $0. Guess what customers choose ?

      • http://twitter.com/LunaticSX Lun Esex

        “Guess what customers choose ?”

        In the U.S., according to the data about the three top selling smartphones on all four major carriers, it’s the $650-$550 phone for $199-$99, *not* the $180 phone for $0.

        You can keep talking about “good enough cheap phones” and “this is how it is in country (x)” until you’re blue (and boy, your face is a lovely shade of indigo already :) , but these are the simple, hard facts in the U.S. market.

      • obarthelemy

        Thanks Mr. Obvious. That customers would choose the $550 “gift” not the $180 on was kinda my point ?

      • http://twitter.com/LunaticSX Lun Esex

        Considering that you keep talking up $200 “good enough cheap phones” you appear to be talking at cross-purposes.

      • obarthelemy

        You do understand that in one case the phone is a gift, in the other, a cost ? As a gift, I want the most expensive one. As a cost, not so.

      • http://twitter.com/LunaticSX Lun Esex

        A gift?! Would that it were so!

    • obarthelemy

      Indeed. I think there’s 3 issues:

      1- High-end phones are siphoning a lot of money out of the bundles.I’m sure they’re by far the biggest cost, so carriers would like to get rid of them.

      2- Carriers’ end game is selling contracts. High-end phones used to be required for that, now they no longer are: a $200 phone amply justifies a data contract, and can eat up as much data as a high-end one (mostly, streaming video and music is what eats up data)

      3- Since contracts need to amortize the cost of a premium phone, contracts are more expensive for customers who’d be happy with a low-end or mid-range phone. The couple hundred dollars extra up-front does not make up for the difference between a cheap and an expensive handset, so bundles with cheap phones end up comparatively overpriced, hurting overall demand and the competitive position of bundlers vs unbundlers.

      De-bundling and price transparency seem like a good answer to those issues.

      • difference

        “a $200 phone amply justifies a data contract, and can eat up as much data as a high-end one”

        Can, or does? An important difference. If one thing is clear, it is that customer usage is very different from phone to phone, platform to platform.

      • charly

        The argument is that a new $200 phone is as (almost) good as a $550 phone. Historical that wasn’t the case so people would use them differently.

      • difference

        Where’s the sign that these new $200 phones have equalised usage statistics? Why should I believe the argument?

      • charly

        There are no usage statistic because the Motorola G has just entered the shops. But you can compare it with a SIII. Technically it is about equal so you would expect users with the same data plan to use them the same

      • charly

        You could look at the statistics for SII users that upgrade to a S4. My bet is that there is hardly any difference except large pictures.

      • difference

        Actually, you probably wouldn’t expect people to use them the same, because the two groups are self-selected. It would be interesting if they were.

      • charly

        People at the end of their 2 year contract are using the equivalent of a $200 phone. If you see a big increase in usage when they get a new phone then you could say that expensive phones are drivers of network usage. If not, and i expect this to be true, then $200 are (nearly) equivalent.

      • obarthelemy

        can of course, same as a $750 phone can use as little data as any other phone (and many do)

      • difference

        Why do you insist on arguing at the microscopic level about things that are only relevant to the discussion at the macroscopic?

      • obarthelemy

        the devil is in the details

      • difference

        Not at all. Whether you can find a single user that behaves this way or that has no impact on the aggregate statistics.

      • obarthelemy

        That’s quality vs quantity. If you observe something at the macro level that makes non sense at the micro level, it means more investigation is warranted. Like say “unbundling is a bad proposition” when there’s a lot of unbundling going on everywhere.

      • difference

        It makes perfect sense at the micro-level, though, to everyone else with a rudimentary understanding of statistics.

      • obarthelemy

        Yep. ‘coz statistics are all about the micro level.

      • charly

        It made sense at the micro level because people needed a smart phone. They don’t need a smart phone anymore because they already have one.

      • obarthelemy

        And, again, the “data usage” argument is very flawed:
        1- carriers sell contracts, not data by the byte, so really don’t care how much data you actually consume, they just care which contract you bought
        2- on the contrary, in many countries, contracts are “unlimited”, which means the argument gets reversed: carriers want users to use as little data as possible, as long as they do get the unlimited contract.

      • difference

        Ah, so there’s no relationship between a persons data usage and the contract they’re on. And there would be no correlation between greater data use and increased carrier revenue. Amazing, difficult to believe, and good to know.

        Thanks for refuting your own original statement in 2, for some reason.

      • obarthelemy

        Depends if you’re in a metered country/carrier, or an unmetered one.
        and 2- there is some link, but not a hard one. Me for example, I’m on unlimited, eat up only 500MB/mo (I got wifi most everywhere), and those mostly because I haven’t got to the trouble of configuring wifi-only updates and attachments, which I could/should.

      • difference

        “Not a hard one.”

        Okay, what’s the mathematical relationship?

      • obarthelemy

        Sorry, I only have anecdotal data. And only ever have seen either anecdotal or very partial data.
        With the way pricing is in my country, it’s pretty much binay: need 50MB max, pay $2.7/mo ($0 if using as ADSL/Fiber provider, that’s enough for mail w/o attachements and IM), need more, pay $27/mo ($16 resp.) That leads to a lot of people wildly under-using their unlimited countracts, byt there isn’t much interesting inbetween, and those come with other restrictions (included “talk” countries, no network neutrality…)

      • difference

        If that’s true, then even your locally-gathered anecdotal data is useless to this discussion. Obviously if most contracts are unlimited (and therefore everyone is wildly underusing them by definition) then it’s not relevant. It would be interesting to know how the 50MB ma vs unlimited contracts fall per platform, though.

      • obarthelemy

        Per platform, no so much. Per low-end vs mid-range vs high-end phone, rather.

      • obarthelemy

        It is relevant though,
        1- to debunk the charade that iPhones (or other high-end phones) are used as data sellers, because once on unlimited, data is free to the user, and a cost to the carrier.
        2- to put the iPhone market share in perspective. iPhones are most (only ?) successful when given away for free (or close to free). What does it say about demand for them ?

      • difference

        That trivially doesn’t debunk it at all for markets without unlimited data, so I don’t understand your point.

        What is your definition of successful?

  • Davel

    My understanding is that in Europe bundling is not the standard. You buy a phone ( without contract) and you buy a prepaid service. Perhaps this is why we have the dichotomy between there and the USA.

    Here I the US tmobile is trying the unbundling and it is working. Now offering a unique service in an ecosystem will win for that organism. This is always true. It seems its competitors are learning that lesson and offering similar services blunting tmobiles advantage

    • http://www.asymco.com Horace Dediu

      It depends on country. In some countries bundling is actually illegal (or was) and in some it’s quite conventional. In Finland for example it used to be illegal until the operators lobbied the authorities to allow it for the launch of 3G. The concern was that when 3G was rolled out there would not be interest in the new, more expensive phones which worked with it. No phones, no service and no money to pay for the 3G. The rules were changed and bundling came to be quite normal in Finland.

  • kathy anderson

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