Salocin

There's a concept in pricing theory known as "Bundling", and another concept - this one from negotiation strategy, called "Information Asymmetry". The first involves taking two products with different characteristics, selling them as a unit, and setting the price such that the seller sells more units and makes more money than he would have selling the items separately. The second involves providing someone with a choice where you know more about the relative worth of the options than they do.

An example of bundling might be, putting a DVD of "Die Hard" in a box with it's unbelievably awful sequel, "Die Hard II", and charging a premium for the bundle. While consumers may think they're getting a really good deal on the two movies, the reality is that had they been offered the two movies separately for the same total price (say, "Die Hard for £10, and Die Hard 2 for £4), they would have bought one and not the other. This is relatively benign, because ultimately, all the information they need to make their decision is on the box, and if they choose to be taken in by the offer, at least they can't claim to have been misled - the consumer gets exactly what they think they're getting - there's nothing sneaky or underhand about the offer.

But what do we make of an offer by the Carphone Warehouse subsidiary, "TalkTalk", for "free broadband forever", if you just buy a £9.99 international call package?

Could it be that TalkTalk are really going to spend £160M (that's what they claim, I'd be surprised if it didn't cost a whole lot more) to unbundle 1000 telephone exchanges in the UK, covering 70% of the population, and give the benefit of this massive investment away for free? Has the telecoms industry abruptly metamorphosed into a philanthropic community?

The Carphone Warehouse's shareholders are not sueing the company, or kicking the board of directors out on their asses, so my guess is that there's more to this than meets the eye.

So what's really going on? Well, first of all, this is a prime example of "Bundling" - you can't get the broadband for "free" without buying a bunch of other stuff, so basically, you're paying for the broadband - this little bit of misleading marketing - shocking though it is - has somehow not raised the ire of whatever authorities regulate this sort of thing, so it's important to set the record straight up front here... There's nothing about this offering that's "free", that's misleading marketing, plain and simple.

To be eligible for the broadband connection, you need to...

• Transfer your telephone line to Carphone Warehouse for £29.99.
• Pay £11.00 per month line rental to TalkTalk.
• Buy the Talk3 call package for £9.99 per month.
• Pay £0.50 per minute if you call technical support after the first 14 days.
• Sign up for 18 months (6 months longer than any other offering on the market).

As a result of all of the above, you get...

• Standard rates on non-geographic numbers (anything that starts with 08 or 09).
• Standard rates on all calls to mobile phone networks.
• Free calls to a number of international destinations provided you use carrier pre-selection (dial a code before you dial the number).
• Broadband, initially provided through BT's wholesale service, and up to 8 Mbps once TalkTalk get around to unbundling your local exchange (date unspecified).

All of a sudden, this package doesn't quite look as shiny as it did. In fact, there's the distinct odour of grass, after it's been digested by a bull.

The deal itself, were it not for the 18-month contract and the premium-rate helpline, is still fairly competitive with everything else on the market, but the marketing trickery doesn't stop there.

By giving everyone these cheap phone calls to international numbers, TalkTalk have given themselves an advantage when comparing themselves to other providers. Instead of comparing themselves to BT Option 1, they compare themselves to BT Option 3. If they quote someone else's broadband product, they slap on a hefty additional amount onto their competition's price for free international call packages, or higher broadband usage (they cap theirs at 40Gb, whereas most of the competition have intermediate products capped at 2Gb per month, and top-level products that are uncapped). A quick glance at Wanadoo's website indicates that 90% of Wanadoo's users use less than 2Gb per month, so TalkTalk are basically giving you lots of capacity you're unlikely to ever use, and thus giving themselves a license to compare their prices to their competition's most expensive products.

Another aspect is that premium-rate helpline. If ever an exchange goes down, and up to 1000 customers find themselves without broadband, that'll be a couple of hundred phone calls to that line asking what went wrong, and a hefty little chunk of income. They make money when their network breaks - what a business model! I'm sure they'll offer to reimburse those callers who complain about the cost, but realistically, what proportion will do that?

With all the differences between this offer and the others on the market, it can be really difficult to make a straight comparison - especially when they've helpfully drawn a little table at the bottom of their website that compares their cost to the higher-rate products from other providers, and completely fail to mention anywhere the fact that calls to non-geographic numbers and mobile phones will cost just as much as on any other network, and statistically make up a massive percentage of phone calls from home lines.

But the real trick here, comes from the second business concept mentioned at the top of this article. Information Asymmetry. You see, they know something that you also know, but they understand what it means, and you don't. Their strategy is medium-term, whereas most people buy broadband and telephone products by looking at the prevailing prices at the time they make their purchase. The fact that you need to consider is this: Broadband and telephone prices are in free-fall.

Every 3 to 6 months, the price of broadband ratchets down. What's more, with VoIP providers like Skype entering the market, the cost of long-distance phone calls for most people is now considerably below £9.99 per year. In fact, if you have a broadband connection, and your correspondent has a broadband connection, you really don't need to use telephone networks at all - that business model is on it's last legs already.

Within 6 to 12 months, telephony and internet connectivity will have completely merged. It will be economically disadvantageous to buy them separately, because 8-meg broadband makes a telephone redundant - it's just that the hands-on technology and the population at large haven't caught on yet, but that'll happen pretty soon. As this happens, the price of the combined package will fall to well below the £20.99 currently required to join TalkTalk.

Only you signed an 18-month contract, didn't you? Looking back at the decision, your rueful comment will be, "well, it looked cheap at the time". By signing with TalkTalk, you opt out of any other offerings for 18 months, and by guaranteeing that revenue, TalkTalk have guaranteed that they will make a profit on every single customer that signs up. At 8-meg, you can't really get streaming TV to your PC, but while all the other providers upgrade their customers to 20-meg, you'll still be stuck with TalkTalk, who will have no incentive to make that additional investment in their infrastructure. All of a sudden that £160M investment doesn't look so bad, assuming they do it to cost and to schedule. By choosing an offering that is a couple of months ahead of its time, customers will be locking themselves in the past, with a soon-to-be redundant service, for a year and a half.

It gets slightly worse, still. What's currently on offer is known as "double-play" - internet plus telephone. There are a few triple-play providers out there - NTL and Telewest in particular. Their services are rubbish for the time being, largely because of the choice of channels and the iffy nature of their customer service, but they will improve fast. TalkTalk customers will still have to pay for their television service separately for the next 18 months, and will be unable to benefit from price-competitive bundles from alternative providers as TalkTalk milk them for the duration of their contract.

Finally, there's "quadruple-play" - Virgin may consider offering this, and it involves your home phone, broadband, television and your mobile phone subscription all bundled together. This could turn out to be a very competitive package. In reality, who knows where the telecoms market will be in 12 months time? It evolves so fast that most of the industry literature gets rewritten every six months. One thing is for certain, however : in 12 months, TalkTalk customers who signed up today will be paying more for their combined television, phone and broadband than most other customers who will have signed up 9 months from now, and may find themselves excluded from some services entirely, unless they're willing to suck up the cost of buying products separately at much higher cost, or breaking their contract, paying off the balance when they do so.

Saw this. Love it. Plagiarised it.

The problem with the world is stupidity. I'm not saying there should be a capital punishment for stupidity, but why don't we just take the safety labels off of everything and let the problem solve itself?

Source unknown, but clearly on my wavelength.