Estimating Demand for Fixed-Mobile Bundles and Switching Costs between Tariffs
28 Pages Posted: 5 Mar 2015 Last revised: 16 Sep 2015
Date Written: March 4, 2015
In the last years many telecommunications operators in Europe introduced fixed-mobile bundles (quadruple play tariffs) which include mobile voice and data, fixed IP voice, fixed Internet access and IP TV. The introduction of these offers raises some questions. First, it is important to understand what is the consumer valuation of particular tariff components and what is their impact on consumer surplus. Since mobile, fixed voice and broadband satisfy communications needs, another question is to what extent there is an additional value created when they are sold jointly, i.e., whether they are complements or substitutes. The interaction between fixed and mobile data services is often studied separately from voice interaction and rarely for both. Our study aims to understand fixed-mobile interaction both for voice and data services.
This paper estimates demand for fixed-mobile bundles (quadruple play tariffs) using a database of subscribers to a single mobile operator from a single town in a European country which has full coverage with both ADSL and FTTH broadband technologies. We merge together two datasets to construct the choice sets: (i) monthly billing database including information about the tariff used by each consumer in the last 12 months before December 2013; and (ii) database on the characteristics of mobile tariffs. The most important attributes of tariffs are: (i) list price per month; (ii) length of commitment; (iii) whether a telephone subsidy is offered or SIM card only without handset subsidy; (iv) whether voice minutes are unlimited and if not what is the volume of minutes included in the list price; (v) the volume of mobile data in GBs included in the offer; and (vi) option for fixed broadband access none/ADSL/FTTH.
A discrete choice framework is commonly used to analyze choices of telecommunications products including choices of tariff plans. In discrete choice models each individual chooses between a set of discrete alternatives with preferences depending on his characteristics and product attributes, and selects the one which maximizes his utility.
Based on the demand estimation we find that consumer valuation of FTTH broadband in 2013 increased over time while ADSL lost on attractiveness relative to FTTH but also in absolute terms, which suggests that consumers increasingly care about the speed of connection offered by FTTH. The consumer surplus increased substantially due to ongoing transition of consumers from less valued quadruple play tariffs with ADSL to more valued with FTTH.
We also find that mobile data is complementary to fixed broadband access. Mobile Internet access became possible since the introduction of 3G technology and the usage of mobile data is on rise with ongoing deployment of 4G LTE technology. However, there are bandwidth constraints of mobile networks which do not allow offering unlimited data volume within mobile tariff plans, which is nowadays a standard for fixed broadband offers. Consumers can therefore use mobile data to sample online content such as a movie and then they can complete online activity using fixed broadband at home, which has no download limit and is cheaper. Thus, fixed broadband services provide additional value to mobile data services. Consumers who get fixed broadband access value more having mobile data and vice versa.
On the other, we find that mobile voice usage is a substitute to fixed broadband access and consumers reduce their voice consumption once they get broadband connection. Because of the nature of voice calls, consumers have to choose to make a phone call using either mobile phone or fixed-line connection. Hence, consumers who purchase fixed broadband value mobile voice services less because they can also use fixed broadband for voice communication.
Keywords: Quadruple play; FTTH; ADSL; Mobile data; Switching costs
JEL Classification: L13, L50, L96
Suggested Citation: Suggested Citation