The Pitch: The Bundle--What, Why & How Much?

Posted: 04/1999

The Bundle–What, Why & How Much?
By Liz Montalbano

When AT&T Corp. launched its Personal Network offering Jan. 27, telecom bundling
theorists finally saw their pontifications realized in what is being touted as the first
true bundle for consumers.

AT&T Personal Network combines wireless, wireline, home phone and payphone calling
at one rate–10 cents per minute–and on one bill for a monthly fee of $29.95.

Although its package pricing is not compelling, analysts say that it is likely to set
off a wave of similar offerings by competitors. "Sprint is the only carrier that
currently has the services to launch a truly [competitive] program," says Jilani
Zeribi, an analyst with Current Analysis, Sterling, Va., noting that MCI WorldCom Inc.
lacks a wireless program and the next most likely suspects, the regional Bell operating
companies (RBOCs), are not allowed to provide long distance services.

"Competitors with gaps in their portfolio (e.g. wireless, 800 or calling cards)
should develop a strategy to fill in those gaps quickly if they intend to compete at a
bundled services level," Zeribi says. "At the very least, they should develop
competing plans that may not include specific service, but compensate accordingly (i.e.,
lower the price below AT&T’s or add other features)."

Defining the Bundle

Assembling the bundle is easier said than done. The difficulty is exacerbated by
disagreement over what the term actually means. According to Boyd Peterson, vice
president, consumer market convergence at Boston-based The Yankee Group, carriers walk a
fine line between bundled and what he calls "packaged" services.

"There’s a difference between bundling and what we would normally call
‘packaging,’" he says. "The difference really is bundling implies services that
become transparent–natural bundles are local and long distance, maybe long distance on
your wireline phone, or wireless or wireline with call waiting, caller ID, voice mail, all
of that stuff–things that sort of operate together. Then you get this other area of
packaging, which is really some distinct things that have some correlation and they’re
offered together, and by putting them together it sort of makes sense."

He cites this example to explain the difference: "Packaging is like a VW
(Volkswagen) Golf with a Trek mountain bike on the top. Bundling is [when] your Golf comes
with floor mats."

Jim Suzansky, partner at Arthur Andersen LLP, Chicago, agrees that the definition of
bundling can be tricky. "There are plenty of firms that are smashing two things
together and calling it a bundle."

But, says Suzansky, when his company was faced with defining the term for a study it
conducted for its new report "The Why, When & How of Bundled Services," it
decided on the simplest of definitions: "joint sale of two or more services."

Given that definition, the study predicts that within the next two years, 94 percent of
all companies will be offering service bundles in the business segment and 84 percent will
be offering them in the residential segment.

Deja Vu

Though the carriers’ rush to bundle services seems like a fight for the newest dress on
the rack, the prize is really a retro fashion. Back when the Telecommunications Act of
1996 was just a gleam in the eye of telecom legislators and the World Wide Web might have
referred to an international spy ring, telecommunications services were a package deal.

Suzansky, a seasoned veteran of the telecom industry, says that the divestiture of
AT&T in the early 1980s "was probably the clearest stake in the ground in terms
of separating" the elements of telephone calls. Before that, he says, they were all
included in one package. But, after a period of time when the elements were
compartmentalized, providers then began to second-guess the decision that made them that
way.

"[They] began realizing that it was very confusing to their clients, and that’s
when [they] began to be moving toward bundling," Suzansky says.

Rather than risk alienating their customers, carriers increasingly are turning to the
bundle as a way to attract and keep customers. (See chart, "Why are Companies Rushing
to Offer Bundled Services?" below.)

"If [your company exists] or existed in one of the vertical segments–long
distance in particular–you see your part of the market as being commoditized,"
Peterson says. Value-added services, he says, will be key to retaining customers and
improving revenue streams.

Package Pricing

Improved revenue streams may come from keeping customers longer as opposed to charging
premium rates, however. In fact, notes Arthur Andersen in its survey, one of the key
debates about bundled services is over effective pricing.

Some argue that they can support premium rates because of added convenience of
integrated billing and customer service. Others argue that the bundle may require deep
discounting to the point of cannibalizing individual service pricing. The middle ground
suggests that some moderate discounting is warranted to attract and retain customers, but
that deep price reductions will not be necessary. (See chart, "Pricing Strategies for
Residential and Business Bundles," below.)

Graph: Pricing Strategies for Residential and Business Bundles

Price, in fact, is where analysts say that AT&T’s new offer falls short. While the
AT&T Personal Network offers a lukewarm long distance rate, its wireless rate is
compelling, they say. However, analysts note the company’s biggest challenge may lie in
selling consumers on a monthly fee, which is nonexistent with long distance and typically
combined with free minutes for wireless services.

"AT&T has an uphill battle marketing this service and convincing users of the
merit of its services," analyst Zeribi says. "Once the message is accepted,
however, the company could make a substantial splash."

Zeribi says that the service targets high-end customers that want convenience, quality
and service and are willing to sacrifice possible savings that they might achieve through
an amalgamation of other plans.

A mid-1998 study by The Yankee Group found consumers aren’t really looking at the
bundle as a price buy. Sixty-six percent of U.S. consumers wanted bundled services for the
convenience, 62.9 percent wanted them for one-stop customer service and 78 percent were
interested in the single bill, according to the study.

Bundling as Company Objective

Some telecom providers actually are formed as bundled service providers, with offering
one bill for natural bundles such as local and long distance service–and even stretching
them to include Internet access and cable television services–at the top of their agenda.

Shay Houser, CEO of State Communications, Greenville, S.C., formed the competitive
local exchange carrier (CLEC) in November 1997 with the intent to bundle services. In
fact, Houser says the company did not even try to reach customers until June 1998 because
it spent seven months securing a back office that could handle the integration of services
on a single bill.

"We went out of the chute last June with a bundled product of local and long
distance and actually just rolled out Internet," he says. "[Before then,] we
built back office, billing systems, customer care systems and all of that. When we started
marketing in June of ’98, basically we went to the customer and said, ‘Look, we can save
you money off your BellSouth [Corp., the incumbent carrier] bill but if you want to do
that, you have to take our long distance.’ Today, over 90 percent of our 60,000 customers
are on both local and long distance service."

And people like Houser are on to something. Andersen’s Suzansky says that startups who
design their operations support systems (OSSs) to handle bundled services have a distinct
advantage over providers that already have delegated certain departments to handle certain
services.

"As separate services have been rolled out, they’ve been separately supported by
infrastructure," he says. "And each kind of service or product line within a
telephone company, typically in order to roll it out quickly, has its own database,
perhaps and most likely its own billing system and perhaps its own customer service
organization. Bringing those back together in any form is really the biggest challenge the
industry tells us they’re facing: integrating separate service support systems,
reintegrating an infrastructure that essentially is a silo organization right now."
(See chart, "Most Challenging Issues for Bundled Services Providers," below.)

When State Communications was formed, Houser chose residential as his target market;
now State also has small-business customers.

Other notable CLECs offering a bundle are McLeodUSA Inc., Cedar Rapids, Iowa, which
offers a bundle of local, long distance, Internet access and voice mail; and RCN Corp,
Princeton, N.J., which bundles local, long distance, Internet and cable television
services.

Provider of Choice

Research is inconclusive about which type of carrier–interexchange carrier (IXC),
CLEC, incumbent LEC (ILEC), cable television company or energy utility–ultimately will be
king of the bundle. But, a January 1999 report from J.D. Power and Associates, Agoura
Hills, Calif., found that residential consumers more and more are likely to choose their
local telephone providers for bundled services. The same survey, however, found that 35
percent of those surveyed are as likely to purchase bundled services from an electric/gas
provider as they are from a local telephone service provider.

In the commercial market, there may be a different frontrunner, however. A recent
survey by The Yankee Group, for example, found that at least to small- and medium-sized
business customers, long distance carriers are the preferred bundled services provider.

Meanwhile, Arthur Andersen’s Suzansky casts his vote for CLECs and up-and-coming
non-facilities-based startups to lead the continued charge to bundle services, which he
believes will stretch beyond communication services to home utilities.

"I believe many of the startups, the not-embedded providers, whether local or long
distance, I believe many of them are exactly designed for putting together a bundle of
services," he says. "And I think we’re going to see broader and broader bundle
definitions, including cable, including pay-per-view entertainment and pay-per-use content
being accessible. I think we’re going to see a broadening beyond communications and
content to include things like home and energy management."

These survey results notwithstanding, analyst Robert Rosenberg, president of Insight
Research Corp., Parsippany N.J., says customers have one thing to say on the subject of
who they want to sell them their bundle: "Who cares?"

"I don’t believe that the customer really cares what industry the bundle really
comes from," he says. "Moreover, it’s likely to be increasingly problematic
about how to draw a line to define an industry when the wall separating them seems to be
collapsing."

Rosenberg says since many average consumers (10 percent, according to one Insight
study) can’t even tell the difference between a local or long distance provider, they also
won’t concern themselves with who’s giving them the best bundle for the buck–they
just want to get it. Rosenberg says it’s pricing and customer care issues that will decide
from whom customers buy their bundled services.

"In the consumer space, it’s price [that’s important]," he says. "In the
business space, I think it’s going to come down to the ability to be flexible–giving the
customer what he really wants."

Liz Montalbano is copy editor for PHONE+ Magazine.