Navigating the European multi-play market: a roadmap

by Vincent de La Bachelerie, Global Telecom Leader, Ernst & Young

Vincent is the head of Ernst & Young’s Global Telecom Practice of over 5,000 professionals worldwide.

As an Audit Partner based in Paris, Vincent has been involved in the Telecom Sector for more than 15 years. For the past 8 years, he has led the audit of France Telecom and Telefónica.

In addition to providing audit services, Vincent has advised clients on merger and acquisitions, IPOs, fixed assets management, sustainable development, valuations and international financial reporting. Vincent has served as an external Professor of Accountancy at Essec International Business School in France and Singapore since 1990, and is a member of the Advisory Board of The Aspen Institute in France.

Ernst & Young’s Global Telecom Center is part of the firm's commitment to the telecom industry. The Center offers insight on assurance, risk, tax, transactions, and finance-related issues facing telecom executives and boards. The Center links client service professionals from Ernst & Young member firms around the globe, facilitating collaboration and knowledge sharing, and providing consistent, seamless, high-quality service worldwide to Ernst & Young clients.

As the business model for delivering household communications and entertainment in Western Europe shifts from single services towards providing multi-service 'bundles', consumers are still focusing mainly on price when deciding whether to take up or switch bundles. And while content is not a major reason for buying a particular bundle, it does help create customer 'stickiness', meaning subscribers are less likely to consider going to another provider.

These are just some of the headline findings from a new in-depth research study by Ernst & Young into the Western European market for bundled communications and entertainment offerings. The research, covering both consumers and major providers, investigates the impact and future implications of the move towards bundling, as well as mapping out the strategies and capabilities that will contribute to success in this evolving market.

Industry and consumer research methodology

To gain insights into the industry's views and expectations around the move towards bundling, we interviewed 32 senior executives in convergence-related organisations in major telecom markets across Western Europe. The interviewee sample included representatives from fixed and mobile telecom operators, and content providers.

In parallel, to gain a deeper understanding of consumers' perspective on the multi-play market, we conducted an online survey of 5,700 Internet-using households in the UK, followed by a customer study of 1,000 Internetusing households in each of seven key Western European markets:

• Finland
• France
• Germany
• Italy
• Netherlands
• Spain
• Sweden

The consumer study explored telecom services usage, whether those services were part of a bundle, reasons for bundle uptake, potential switching triggers, and future bundling behaviour. We then combined the consumer findings with the insights from the interview programme and our own analysis to create the point of view set out in the report, The Bundle Jungle: Navigating the European multi-play market. Copies can be requested via www.ey.com.

Show me the money

The research is timed at a defining moment for Europe's communications and entertainment market, as formerly distinct services - fixedvoice telephony, broadband Internet access, TV, and mobile - are increasingly marketed as integrated bundles for a single fee, an approach commonly termed 'multi-play'. This shift towards a bundled approach to service design, delivery and billing represents a watershed both for the European telecom industry and its customers. The current rush to create and launch these packages has created a 'bundle jungle' characterised by uncertainty, risk, and opportunity both for providers and consumers.

"Consumers wants simplicity. They want to have freedom of choice, and quality of service. We offer one website, one bill, one customer service point for our triple-play." TELECOM OPERATOR

European Rank Take-up drivers   1 Cheaper than getting services individually   2 Convenience of receiving one bill for whole service package   3 Cheaper broadband access   4 Previous good service from chosen provider with single service   5 The package offer or monthly price was easy to understand   6 Convenience of one point of contact of customer services   7 Flat-rate call plans   8 Quality of introductory offer   9 Cheap call packages   10 Faster broadband access   17 Availability of premium content (sport, movies, TV, or VoD

Chart 1: Rank of bundle take-up drivers

The study confirms that multi-play has reached critical mass across Western Europe, with consumer ownership of bundled services ranging from a high of 87% in the Netherlands to a low of 41% in Finland. This explosion in multi-play services has been triggered by a wide array of factors, including intense competition in legacy 'stand-alone' services, headlong growth in the broadband market, convergence of the underlying delivery technologies, and regulatory shifts such as the opening-up of local loop unbundling (LLU).

While the drivers of multi-play offerings are disparate, consumers remain relatively singleminded in their rationale for buying them. When we asked multi-play buyers why they had bought a bundle, their predominant answer was lower prices (see Chart 1). 'Cheaper than getting services individually' is consumers' main reason for buying a bundle in six of the eight markets in the survey, with other price-based benefits - such as 'cheaper broadband access' and 'flat-rate call plans' - also ranking highly. Overall, the findings show that the ease of understanding the bundle and the value within it are key to the consumer proposition. People are confused, and technology is confusing them further - so they focus on the tangible aspects such as price and the convenience of unified billing. Branding is also important, outscoring advertising as a reason for take-up, with between 4% and 21% of respondents across Europe citing providers' brands as a reason to take up a bundle.

"If this will bring revenue for us and value for the customer, it needs to be easy. A lot of technology has to be managed and it's difficult for the customer." TELECOM OPERATOR

European Rank Switching trigger   1 Slightly cheaper per month   2 Faster speed for same price   3 Poor customer service   4 Good introductory offer   5 Availability of mobile phone   6 Airmiles-style loyalty scheme   7 Recommendation from peers   8 Exclusive premium content   9 Much faster broadband for slightly more   10 Better call plans for slightly more

Chart 2: Rank of switching triggers

The price of switching

As well as driving take-up, price is also consumers' main reason for switching from one bundle supplier to another (see Chart 2). In six of the eight markets surveyed, slightly cheaper bundles are the top switching trigger. Offers with faster broadband speeds also score well as a reason to switch - but while end-users want higher speed, they are not willing to pay more to get it.

Our findings also underline consumers' rising service expectations. Poor customer service ranks highly as a reason for switching away from a multi-play supplier, coming second in both the UK and Germany; but good customer service from a supplier of a legacy stand-alone service is a less important reason for taking up a bundle. So a good customer service experience is key to retaining customers rather than to acquiring them or selling additional services. The consumer findings also show that exclusive premium content is more influential on switching than on take-up - suggesting that once consumers have access to compelling content as part of a bundle, they are more likely to stick with that supplier. Balanced against the switching triggers, customer inertia acts as a brake on switching: the more services a customer takes from a single supplier, the less likely that customer is to switch. In this context, TV is a critical component of multi-play, since customers with TV in the bundle are markedly more loyal than non-TV bundle customers. In contrast, mobile - commonly regarded as a personal rather than household service - fails to claim a place among the leading positive reasons for switching to a new supplier, with its status in the bundle still unclear both to consumers and the industry.

Competition, consolidation…

Consumers' focus on price is fully reflected in the findings of our industry research. These show that the differing legacies of incumbents, altnets, and cable operators mean they are confronted by a variety of challenges in multiplay. But they all face a daunting hurdle in seeking to make money from new bundle elements. As they see it, consumer education and effective segmentation of the customer base - pursued in parallel with true convergence of technology platforms - will be paramount in achieving this.

"The main challenge that we face is a total price war - we have to get more and more competitive with our prices." TELECOM OPERATOR

As providers face up to these pressures, the multi-play market will be shaped by the quest for profitable growth, the traction gained by bundled TV offerings, ongoing regulatory actions, and evolving competitive strategies. Bundling - especially in broadband - will continue to demand scale, making further consolidation inevitable. And alongside services, regulation in each market will also need to evolve to maintain a level playing-field for all competitors.

…and new skills

As the multi-play landscape takes shape, EY's research and analysis indicate that the most successful providers will be those that target their network investment accurately at returngenerating opportunities, while also developing the right responses around competencies, services, and brand.

Chart 3: New competencies for multi-play providers

As Chart 3 shows, a consistent and credible experience across the bundle will be just the start of what is required. Building on this platform, optimised customer service will be key to retaining price-sensitive end users. And new skills will come to the fore, with operators needing to invest in building and exploiting their brands while ensuring that their marketing messages educate the customer.

New technical competencies will also be crucial, as multi-play providers tackle ongoing external factors such as a fast-evolving TV market, technological evolution, and continuing price pressures. An ability to use hypersegmentation to exploit national or regional opportunities will be critical for building market share and revenues. And customer premises equipment (CPE) will be an important differentiator, requiring high-quality, low-cost sourcing.

The future bundle landscape

So, what will the bundle landscape look like in five years' time? In our view it will have five c's: consolidated, customer-centric, cost-sensitive, content-rich, and converged.

Consolidated - Only multi-play providers with scale will be able to deliver a consistent experience throughout the bundle."

Customer-centric - Successful multi-play providers must deliver a consistent yet personalised experience through a strong brand and best-of-breed back office.

Cost-sensitive - Price will continue to be a key influence on consumer take-up and (increasingly, as saturation approaches) switching.

Content-rich - As the role of TV in the bundle becomes clearer, TV (and very likely mobile) content will become an increasingly important driver.

Converged - Service bundling has led the way to date, but true technology convergence will accelerate the shift to multi-play.

Today's confused and confusing 'bundle jungle' is an inevitable transitional phase on the journey to tomorrow's fully converged multi-play services. The successful operators will be those who build and expand their bundles in a planned, consistent, and commercially-focused way, while maintaining high service quality and enhancing their brand. Given the need for scale, the likelihood is that only a handful of very large, consolidated players will succeed.

To obtain a copy of this report please contact:
Ernst and Young on globaltelecomscenter@uk.ey.com
Or it is available at www.ey.com