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Sunday, March 22, 2015

Winner takes all?

I cannot forget when my children and grandchildren were little bundles of joy. But in the world of contracting, both government and private (as discussed below), some bundles are filled with despair, and anti-competitive effects.

In US federal contracting, bundling is recognized to provide benefit to the government as a means of reducing costs through efficiencies (although I am unaware of how that gets quantified).
Bundling may provide substantial benefits to the Government. Measurably substantial benefits may include, individually or in any combination or aggregate, cost savings or price reduction, quality improvements that will save time or improve or enhance performance or efficiency, reduction in acquisition cycle times, better terms and conditions, and any other benefits. The agency must quantify the identified benefits and explain how their impact would be measurably substantial. Except as provided in paragraph (d) of this section, the agency may determine bundling to be necessary and justified if, as compared to the benefits that it would derive from contracting to meet those requirements if not bundled, it would derive measurably substantial benefits (for which certain thresholds are given). Reduction of administrative or personnel costs alone is not sufficient justification for bundling unless the cost savings are expected to be at least 10 percent of the estimated contract or order value (including options) of the bundled requirements. Reduction of administrative or personnel costs alone is not sufficient justification for bundling unless the cost savings are expected to be at least 10 percent of the estimated contract or order value (including options) of the bundled requirements.  ( See FAR Subpart 7.107, Additional requirements for acquisitions involving bundling.)

Bundling is also recognized to adversely affect the ability of small contractors to obtain work they would otherwise be competitive to perform. Indeed, it appears that the only reason bundling has percolated up to attention at all as possibly anti-competitive is because of the social welfare income-shifting politics behind the Small Business Administration framework. (Don't get me wrong, I support some efforts to retain the small business engine of the economy, both as an incubator of enterprise but also to inhibit the progressive monopolization of of big money. I just think we need to call a spade a spade so we know the limits of what it is we are dealing with.)

This is revealed in the way the federal government has defined "bundling": it applies to existing contracts, however, there is movement to extend bundling rules to new contracts as well. Thus, an early study of the negative effects of bundling was criticized by the GAO in 2000:
The Office of Advocacy, an independent agency whose mission is to represent and advance small business before Congress, has sponsored studies that have concluded (1) that the federal government has fallen short of its 1998 goal of 23 percent of its prime contract dollars being awarded to small businesses and (2) that contract bundling is growing and negatively affecting small businesses. The Office of Advocacy's study is the only government-wide study to be completed to date and it concludes that contract bundling has increased and had a negative effect on small business' share of federal contracts; however, the study's analysis was based on a definition that was broader than the statutory definition of contract bundling and provided no convincing evidence that bundling caused adverse effects on small businesses.
The following report from the Congressional Research Service provides (in this quote) a brief description of the history of the bundling issue.

Contract “Bundling” Under the Small Business Act: Existing Law and Proposed Amendments
“Bundling” refers to the consolidation of two or more requirements for goods or services previously provided or performed under separate smaller contracts into a solicitation for a single contract that is likely to be unsuitable for award to a small business because of its size or scope. Although bundling can potentially reduce costs or improve performance for federal agencies, it can also limit opportunities for small businesses to receive federal prime contracts. For this reason, Congress amended the Small Business Act in 1997 to require that procuring activities comply with certain procedures before issuing a bundled solicitation. Specifically, the 1997 amendments require that procuring activities (1) conduct market research to justify acquisition strategies that could lead to bundled contracts, (2) provide advance notice of bundled solicitations to the Small Business Administration (SBA) and incumbent small business contractors, and (3) implement certain procurement strategies when solicitations involve “substantial bundling.” These steps are intended to ensure that any bundling is “necessary and justified.” Only “unnecessary and unjustified” bundling is prohibited under the 1997 and subsequent amendments.
Although bundling can be done if justified, it seems that requirement is not being heeded, and it is bumping up against cost-cutting measures intended to consolidate contracts, just the opposite of moves to prevent restrictive bundling. (The GAO report previously mentioned describes bundled contracts as a subset of consolidated contracts; a special case to be applied restrictively.)

Concerns over contract bundling cast shadow over 2013 small business successes
Rob Burton, a procurement attorney with Venable in Washington and a former deputy administrator at the Office of Federal Procurement Policy, said the issue of bundling and consolidation and the fact that agencies consistently are ignoring the requirements to justify their decisions isn't getting a lot of attention.

Emily Murphy, a House Small Business Committee staff member, said, "The numbers [of bundled or consolidated contracts] in the database are wrong, and that's bad from a public policy standpoint. But it's even worse when you consider it means that neither the justification, the mitigation nor the data capture is taking place when it comes to bundling or consolidation." She said the administration's goal of maintaining a certain percentage of dollars going to small firms doesn't take into account the long-term impact on the industrial base that these efforts are having on the companies in the private sector.

Ken Dodds, the Small Business Administration's director of policy, planning and liaison, said bundling has been a huge issue since the late 1990s. "Let's be clear: agencies can bundle, and they can consolidate. They just have to justify it. There are thresholds they have to do. They have to analyze the data. They have to mitigate. There are things they have to do," he said. Dodds said the problem is that there is little to no follow up with the agency that decided to bundle the requirements or contracts to see if they met their justification in terms of savings or efficiencies.

This issue came to light just recently when SBA ruled that GSA didn't justify its rationale for consolidating requirements under the office supplies 3 strategic sourcing solicitation.
I would think that that same kind of particularized justification for bundling in small business context should be extended to large scale "consolidation". Anti-competitive consolidations are just as invidious for large business as small, and minimized competition, at whatever the convenience is assumed to be, cannot justify the need to encourage competition.

But what about the private sector? Is winner take all consolidation simply part of the laissez-faire free market ideal, or should anti-competition laws or regulation also have a role to play in consumer choice? Consider sports TV.

Lawsuit could end sports leagues' all-or-nothing TV packages
Fans have long asked for tailored options to view live games on TV and other devices, saying league-wide [bundled] packages such as Major League Baseball's Extra Innings, the National Football League's Sunday Ticket and the National Hockey League's Center Ice offer more games than they want or can possibly watch.

A Boston baseball fan living in Los Angeles, for example, would currently have no choice but to order hundreds of games from across the league just to see the Red Sox play. The Extra Innings package, offering up to 80 out-of-market games a week, is advertised by cable providers for $195 a season.
Sony PlayStation Vue Is Cable TV Without The Cable Company
Sports fans can opt for a $60 per month bundle that adds regional sports networks like YES (New York) and Comcast SportsNet (Philadelphia and Chicago). ESPN (along with other Disney properties like ABC) remains a glaring omission for now. But by reaching distribution deals with carriers of pro franchises like the Yankees, Cubs, Bulls and Phillies, PlayStation Vue provides live home team coverage, a must for many cable subscribers. A $70 per month top-tier bundle brings the channel total to 85 with the addition of several family and lifestyle networks.

None of this sounds much different from a traditional pay TV package, minus the contract commitment and standalone cable box.
Cutting the cord: A sports fan's new breed of TV
As hundreds of thousands of Americans give up cable or satellite TV every year — watching their favorite shows on streaming devices such as Hulu or Netflix and earning the trendy name “cord cutters” — sports fans are being left behind, feeling chained to their expensive menu of channels because not enough alternatives exist outside of conventional methods.

Kevin Watterson, 34, lives in Minneapolis and considers himself a sports fan. But he ditched cable in 2013, fed up with his $120 monthly Comcast bill — which covered cable and Internet, but was soon to increase in price after the end of a discounted promotional period.

Today, he pays $130 a year for the MLB.TV package, streaming games onto his large screen via Apple TV, a $69 device. He watches other sports available over the air, via an HD antenna that can cost $40 or less. And he’s planning on picking up Sling TV, a new $20-a-month service that gives viewers a limited menu of channels, including ESPN and ESPN2, during April so he can watch the Masters.

“Sports is the last must-see-TV. You can watch everything else on demand,” said Dave Warner, 43, a recent sports fan cord cutter who analyzes TV sports trends on the website

But each channel costs something. ESPN and ESPN2 combined, for instance, make up a little over $6 on your monthly bill, Warner said. Other channels are a couple of dollars here, a few dollars there. It adds up — as providers, networks and fans know.

“It’s going to be a while until cord cutting really makes [networks] nervous,” Warner said. “They see it, but it’s not enough to truly impact their bottom line. For now, the networks are going to milk the cash cow for all its worth, and they will until nobody can afford it anymore.”
Big Ten facing crucial decisions about its TV future
The Big Ten Tournament has a nifty network threesome when it comes to television this week. Three networks -- CBS, ESPN, and the Big Ten Network -- will provide extensive coverage.

The more, the merrier from the perspective of Commissioner Jim Delany. The league's football and basketball deals with ESPN/ABC and CBS expire after the 2016-17 basketball season. Negotiations are expected to heat up soon, assuming they haven't already. One thing is certain: The Big Ten should be in line for a windfall. The conference will get significant increases from its 10-year, $1 billion deal with ESPN/ABC for football and basketball and 6-year, $72 million pact with CBS for basketball; It also has a 25-year, $2.8 billion deal with the league-run BTN that extends through 2031-32.

Delany knows his timing couldn't be better, as the Big Ten's TV rights will be the last major sports property, pro or college, to be on the market in this decade. That news isn't lost on Fox Sports, which desperately needs top-tier live programming for its cable outlet, Fox Sports 1. The network has struggled to gain a foothold in 1 1/2 years of operation. Fox is expected to make an aggressive bid for the Big Ten's rights. CBS Sports Network and NBCSN are unlikely contenders in this derby.

There are several factors in play, including this scenario: Delany might not have to pick between ESPN and Fox. With the commissioner looking to cash in big, there's speculation the price might be too high for one entity to write a huge multi-billion dollar check for the entire package. The best play might be for Delany to cut deals to place games on both networks. The move likely would lead to a bigger payday and it still would give the Big Ten a presence on ESPN.
I remember the days when to get a particular song you wanted, you had to buy a whole album, as the small-hole LPs took over the world of large-hole 45s. Given enough competition from the industry players, consumers will benefit. Given enough competition. 

And remember, the government is a consumer. It must always keep one eye on the market place to assure it "enough" competition. It is for that reason that we find the federal acquisition rule on bundling in the "Planning" part, Part 7, whose policy is "to promote and provide for ... full and open competition to the maximum extent practicable...." (Subpart 7.102(a))

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