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BetterBills may lower telco profits

Comparison shopping site BetterBills is planning to launch a broadband price comparison service, and is currently wooing Telstra (ASX: TLS) and Singapore Telecommunications’ (ASX: SGT) Optus to join its platform.

BetterBills is a newcomer to the Australian comparison shopping industry that currently provides price comparison services for the health insurance and electricity and gas markets. The company’s plan to add broadband comparison to its offering is intended to make it more competitive with established players such as iSelect  (ASX: ISU).

The price comparison industry is increasingly crowded with rivals WhistleOut and Whirlpool also battling for customer attention. BetterBill’s CEO Tim Andrew is hoping that the company can attract shoppers by offering more detailed information than its competitors. The company plans to share data on broadband availability, reliability and speed.

Mr. Andrew recently outlined the customer pain points that BetterBills is trying to address: “We find that too often people are finding out either they have to wait weeks or even months to be connected to their provider of choice when they move into a new property, or that their real-life download speeds are nowhere near the ‘maximum’ speed offered by their provider”.

Price comparison websites typically generate revenues via commissions from referring customers to the plan providers. BetterBills for example shares 50% of the commission it generates with its customers.

BetterBills = Lower margins?

The rise of price comparison shopping could be bad news for the telecommunication industry’s profitability as it reduces switching costs and puts pressure on margins. The industry has typically enjoyed some customer captivity, due to the hassle of comparison shopping and the uncertainty of switching to a new provider. This customer captivity means that telecommunications companies are able to charge higher prices and benefit from less customer acquisition costs.

The move to transparent plan pricing removes these barriers, so companies must continually trim prices to retain and attract customers. The plan by BetterBills to share data on each competitor’s installation times and true download speeds will also remove a lot of the uncertainty that comes with switching providers. As Mr Andrew puts it, “We’re looking forward to helping people to make a more informed choice about the trade-off between speed, price and data when selecting their Broadband provider”.

With all the threats that price comparison shopping poses, why would Telstra or Optus want to sign up in the first place? The answer is simple game theory. The first provider to sign up will benefit from an additional sales channel and all the shoppers that will bring. Once the next player signs up most of that initial benefit will be gone, but the companies that are listed will at least still have more visibility than those that aren’t. Ultimately, the remaining competitors realise that the only thing worse than every provider being on the platform is for every provider to be on the platform except for them.

Foolish takeaway

BetterBills’ plan to enter the broadband price comparison market is a logical next step to keep up with established competitors. Its intention is to differentiate by offering more data on each provider’s speed, reliability, and installation availability. By lowering search and switching costs price comparison shopping may lead to lower margins for established players such as Telstra and Optus. Investors might question the decision to join such a platform — but if competitors are signing on it would be tough for any one player to resist. As the saying goes, if you can’t beat them join them.

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Motley Fool contributor Matt Joass has no financial interest in any company mentioned in this article. You can follow him on Twitter @SoloThink.

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