Bundling Residential Telephone, Internet, and Video Services: Issues for Congress

Publication Date: February 2004

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Media, telecommunications, and information

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Abstract:

Technological advances and deregulatory actions now allow consumers to obtain their local and long distance telephone services, their high-speed Internet services, and their video services from competing technologies. The convergence of previously distinct markets has required companies to seek strategies for holding on to their traditional customers while seeking new one. One of those strategies is for companies to offer bundles of "traditional" and "new" services at a single price that often represents a discount off the sum of the prices of the individual services. These bundled service offerings are favored by many consumers. They provide the convenience of "one stop shopping" and in some situations, by providing the full panoply of services at a fixed price, make it easier for consumers to comparison shop. They also are favored by many providers because they tend to reduce "churn" -- the rate at which customers shift to competitors - and allow providers to exploit economies of scope in marketing.

But bundling also can create public policy issues for Congress. The bundled offerings typically provide some combination of interstate telecommunications services, intrastate telecommunications services, and non-telecommunications services (information services, video services, and even customer premises equipment) for a single price. The federal Universal Service Fund - the federal subsidy program that assures affordable telephone rates for high-cost (rural) and low-income telephone customers as well as for schools, libraries, and rural health facilities - is supported by an assessment on interstate telecommunications revenues only. But it is difficult to identify the portion of revenues generated by a bundled service offering attributable to the interstate telecommunications portion of that bundle. There is no unambiguous way for providers to assign a portion of the bundled price to interstate telecommunications services or for fund administrators to audit that assignment. In addition, some taxes are assessed upon one or more, but not all, of the services included in various bundled service offerings. This creates the same assessment and auditing problem for these taxes as exists for the federal Universal Service Fund. This has important policy implications at a time when many Members of Congress seek to shelter Internet services-which often are included in these bundles- from taxation without placing any group of providers at a competitive advantage or disadvantage.

Some observers have been concerned that bundled service offerings could have anticompetitive consequences if they foster industry consolidation or if a provider has market power for one of the services in its bundled offering and can use that offering to tie that service to a competitive service in a fashion that reduces competition for the competitive service. Leaders in both the House and the Senate Commerce Committees have announced that in the 109" Congress they plan to review and reform the 1996 Telecommunications Act (P.L. 104-104) in light of the market convergence that underlies the trend toward bundling. This report will be updated as events warrant.