BUNDLING STRATEGY PROVIDES SOFT LANDING

Carriers are banking on the ability to package and sell multiple services to help neutralize their otherwise lackluster third-quarter financials. AT&T is so bullish on bundling that it's accelerating its strategy.

Early results show that carriers' service bundling strategies are working better than even they anticipated. In their third-quarter earnings reports, AT&T, SBC Communications and BellSouth all said the number of customers taking more than one service increased significantly and was helping mollify what otherwise would have been unimpressive quarters. Meanwhile, access line revenue continued to flatten or decline.

AT&T, which reported a third-quarter profit of $418 million on revenue of $8.65 billion, saw enough positive performance from its multiservice packages that it announced plans to accelerate its bundling program. AT&T Consumer currently serves more than 3.5 million bundled subscribers, and the company is on track to test bundled services in at least 35 states by the end of the year, AT&T Chairman and CEO David Dorman told financial analysts during the company's earnings announcement.

Specifically, AT&T is testing wireline/wireless bundles in San Diego and Tampa, and is conducting a trial of residential DSL bundles in five states with partner Covad Communications (see story on page 7). AT&T also will roll out the DSL bundle to all states where it currently has in place a local/long-distance bundle, Dorman said.

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AT&T's revenue attributable to its consumer bundles grew to $521 million by the end of the third quarter, a 77% year-over-year increase. Additionally, “bundle relationships” accounted for more than 22% of the company's consumer revenue at the end of the quarter. That translates to $2.1 billion on an annualized basis.

“Bundled local and long-distance service offerings are increasingly the norm, and they have proved to be a strong growth area for us,” Dorman said.

Indeed, bundled offerings are becoming the standard for virtually every carrier. SBC, which had its best quarter ever for DSL net additions due in part to a package offering that includes cut-rate DSL with local service, said the number of subscribers taking more than one service had increased significantly. At the end of 2002, the company said 19% of its customers had purchased bundles of long-distance, DSL or wireless (via joint venture Cingular Wireless). As of Sept. 30, that percentage had jumped to 36%.

Although the company doesn't publicly break out which services its customers are ordering, SBC's CFO Randall Stephenson said during an earnings conference call last week that the company's ability to offer long-distance has a significant impact on bundling and the corresponding ability to stave off access line competition.

“In the Southwest and West, we've had steady improvement for three straight quarters,” Stephenson said.

BellSouth, which reported net income of $936 million — representing a 40% increase year over year — also believes that much of its future growth will be led by bundled offerings, said CFO Ron Dykes.

“Packages produce higher revenue per customer,” Dykes said during BellSouth's earnings call last week. Currently, 2.6 million customers subscribe to one of the carrier's BellSouth Answers bundles, which combine local, long-distance, Internet and wireless services in four different combinations. BellSouth started the year with 1.1 million Answers customers and added 509,000 in the third quarter alone.

“Bundling is our key focus right now,” said Brian Collins, director of consumer marketing at BellSouth. “It's our focus for a reason, and it will be our focus going forward.”

However, figuring out which elements are the most important components in those bundles differs from carrier to carrier. For SBC, which just last month won approval to provide long-distance service in all of its states, the answer appears simple: Bring long-distance into the bundle and it becomes an effective tool for battling interexchange carriers, which largely rely on reselling local service. SBC added 1.7 million long-distance lines in the third quarter, bringing its total to 11.5 million — nearly double year-ago levels and up 17% from the second quarter.

In states where it has long-distance approval, SBC added 48,000 wholesale lines (or lost the equivalent in retail lines) in the third quarter. That's down 55% from the second quarter. In the Midwest, where the carrier only recently gained long-distance approval, the net increase in wholesale lines was 275,000, up 3% from the second quarter of this year. In fact, the Midwest accounted for more than 85% of SBC's companywide increase in wholesale lines during the third quarter of 2003.

“Everyone else bundles, so you can't compete effectively if you're not offering the same kinds of things that your competitors are offering,” said Carrie Hightman, president of SBC Illinois. “There's no question that consumers want one-stop shopping, more than we ever thought two to three years ago, when we started the effort to get into long-distance.”

Bundles that include long-distance are also an effective competitive weapon for BellSouth. The RBOC, which has approval to offer long-distance in all of the states in its territory for more than a year, said it lost 188,000 lines to competitive carriers via the unbundled network element platform in the third quarter. That figure is the carrier's lowest in seven quarters.

“As competition heats up in our marketplace, customers are going to have more and more choices,” Collins said. “If we can give customers what they want all on one bill, and give them the savings they deserve by bundling with us, we think we can give them less of a reason to leave us.”

For some telcos, particularly independent operating companies, video service is becoming a critical bundle ingredient. SureWest, one of the more aggressive IOCs, reported last week that it has reached 10,000 triple-play customers in Sacramento, where it launched a package of voice, high-speed data and video over a fiber-to-the-home network in July 2002.

Of those customers that signed on for the service, 80% took at least two services and 50% took all three, according to a SureWest spokesman.

BellSouth, which expects to be adding video to its bundle soon through its relationship with DirecTV, instinctively understands that competitors soon will be able to offer their own bundles and is pushing to stay ahead of the curve, said Lisa Fox, the carrier's director of consumer marketing.

“Because we can sell them local, long-distance, data, wireless and — soon — video all on one bill, that's really proved to be a good retention tool for us,” she said. “Customers can't find that in our region with anyone else today. We also are trying to streamline the portfolio to make it simpler for customers to understand, and trying to find ways to save them more money through better pricing.”

BellSouth already has improved annual savings on its top Answers bundle to more than $350 versus buying each service separately, Fox said. The next big improvement will be the addition of video early in 2004.

The consumer sector isn't the only place where bundles are becoming a crucial differentiator and opportunity. One of every two U.S. businesses that participated in a study recently conducted by research firm In-Stat/MRD said they currently purchase telecom bundles or plan to make such purchases within the next year. The firm estimated that 2002 bundling revenues generated by small or home-based businesses were about $8.7 billion, and predicted that bundling revenues will grow to $27.6 billion by 2007.