Unbundling

It will be interesting to see how successful the Conservative government’s planned strategy to allow consumers to pick-and-choose their channel packages from satellite and cable TV providers will be. I say this because bundling channel packages and other services together is a key element of the strategy and business models that the telecommunications firms use to capture more consumer surplus and maximize their profits. By allowing consumers to “unbundle”, these business models may be undone.

Bundling works best when the demands for different products are negatively correlated. When the demand for different goods is negatively correlated, bundling is more profitable as it reduces the spread in the valuations that different customers place on different goods. Telcos pursue strategies of both pure and mixed bundling in their TV channel packages. Pure bundling means that consumers cannot buy individual services (i.e., channels) separately, the very thing that the government is proposing to allow. Mixed bundling allows consumers to buy either a bundle or individual channels; for example, while I subscribe to a Rogers bundle, I am still able to purchase, on demand, certain channels that are omitted from my bundle. In both cases, the government’s proposed initiative may dilute or undermine these business models.

Bundling is a form of price discrimination that allows a firm to capture more consumer surplus than it would otherwise, thereby increasing revenues and profits. How the telcos will react to the government’s plans will be interesting, particularly given the contentiousness that erupted over Verizon’s aborted entry into the Canadian telecommunications market.