So many choices

If anything is true of the telecommunications industry as we near the end of the decade, it is that things will definitely get worse before they get better. At least that is what consumers are revealing in recent studies J. D. Power and Associates has conducted among long-distance, local, cable and wireless users in this fast-paced industry. "Overchoice" reigns, and with that comes the need for telecom providers to differentiate themselves in customer service.

Not too long ago, if customers were asked to define bundling, they might describe how they wrapped a baby in a blanket. Today, the word has gigantic implications for the telecom industry. And while consumers may be familiar with the term, they don't really know if one carrier will make them happy. The industry itself is grappling with these same issues.

A report by J. D. Power and Associates reveals important information concerning consumer perceptions of the results of the 1996 Telecommunications Act. The study addressed three key consumer areas regarding the issue of bundling: the consumer's notion of bundling, the type of consumer most apt to bundle, and the relationship between telecom spending and bundling.

Consumer confusion Using research conducted among more than 6100 U.S. households, J. D. Power has identified specific use and behavioral patterns that are driving consumers' decision to bundle.

Clearly, consumers would welcome what the 1996 Telecommunications Act has promised--the freedom to choose any qualified carrier for any or all of their communications needs. If and when this happens, 65% of households indicated that they would likely switch all their services to one company.

Where choices are already available, there is evidence that consumers would switch from their incumbent interexchange carrier to their incumbent local exchange carrier for long-distance service. Two excellent examples of this are Southern New England Telephone and GTE. Both have much more regulatory freedom than the Bell regional holding companies and have benefited greatly by capturing a significant portion of long-distance business.

J. D. Power's research indicates that approximately one-third of SNET's local customer base currently uses the company to place long-distance calls. GTE signed up a million long-distance customers within its first year of offering the service.

While the Independent LECs currently have a competitive advantage over the IXCs in terms of being free to offer residential voice, data and video services to their local telephone customer base, it will be just a matter of time before larger IXCs start to provide the same products. When this happens, the tide may turn for the incumbents. Households willing to bundle services with one company may choose their current long-distance carrier as their sole provider.

Overall, 59% say that their current IXC would be the preferred company for providing all their communication needs. Only 35% would select their incumbent LEC, and a mere 6% would pick either their cable/satellite TV, wireless or Internet service provider as a single-source provider (Figure 1).

What is driving the one-carrier approach? A solid 74% of consumers indicated that they would bundle with one company because they would receive only one bill (Figure 2). Billing is a key issue for providers of multiple services because it may be the only time they directly communicate with their customers, making it an essential marketing tool.

There are other distinct reasons why households select a particular type of company. All relate to issues that will involve clear-cut marketing strategies.

What consumers believe to be better and more reliable service will be important. Consumers also want to see more discounted rates and better handling of their service needs. Probably most critical for the telecom companies that have long-established brands is that a significant number of consumers want to use a company with a good reputation. All these areas will play a role in how the customer eventually will make up his or her mind when it comes to one-source bundling.

IXCs may have the greatest advantage in the bundling arena because they already face competition. However, the future success of any bundling or branding strategy hinges on a thorough understanding of what drives customer satisfaction for each service--not just long-distance. If IXCs want to meet the challenges of bundling, they must understand what consumers expect from local telephone service, wireless communications and even their cable TV service.

J. D. Power's most recent studyreveals a clear correlation between customers' satisfaction with a product and service and their preference for bundling (Figure 3). This pattern is true whether consumers are pleased with their IXC, LEC or cable/satellite TV operator.

Overall, 83% of all households are "extremely" or "very satisfied" with their long-distance service. This compares with 69% and 40% who are satisfied with their local telephone and cable TV services respectively.

The key means of differentiation for carriers choosing a bundling strategy are continually identified by consumers in every study J. D. Power has conducted in this industry. Any company hoping to gain strong market share should study these issues in depth.

Who bundles? Whether or not a consumer is receptive to bundling is also influenced by the demographic and behavioral profile of that consumer. Not surprisingly, the household most likely to bundle is one in which members are actively involved in choosing service providers. These households also tend to be heavier users of telecom services.

Bundlers spend more as well. On average, bundlers spend about 30% more than non-bundlers on their long-distance calls. They also call their customer service center more often with problems or questions. This means that marketers must be prepared with the highest level of customer service to retain a bundler's business.

Bundlers are also less loyal. They are twice as likely as non-bundlers--10% vs. 5%--to switch carriers in the near future. These will be the deal seekers, the customers looking for discounts and extra perks, which will make them harder to please.

The sheer size of non-bundlers, at 32 million U.S. households in 1996, means carriers face an uphill battle in winning their overall business. Given this, it will be crucial for companies to identify potential bundlers from their current customer base. This will require segmentation strategies designed to identify customer spending habits, usage patterns, customer service usage and perceptions of the carrier's reputation.

One way to segment potential bundlers is to look at spending. The basic rule is, "the more consumers spend, the more likely they are to bundle." That includes households that spend heavily on wireless, Internet services and cable/satellite TV.

Segmenting by expenditure also can be an efficient way to identify the type of company with which the consumer may bundle. If expenditures are segmented by preferred company, the results show that households using long-distance services more heavily are more likely to bundle with their current long-distance carrier (Figure 4). Conversely, lower-expenditure households are more likely to bundle with their current LEC.

Implications Monopolistic barriers are slowly eroding. Industry consolidation is heightening the competitive pace.

Multinational companies are worried about losing market share when new players begin to compete for voice, video and even Internet data. Mergers will have a huge effect but may add to consumer confusion. Clarity of purpose and a strong strategic focus will be critical, especially when product offerings increase, and more players enter the market.

The J. D. Power and Associates 1996 Telecommunications Customer Satisfaction Study revealed that consumers are confused about many issues. Pricing plans appear complicated. Product and service offerings need greater differentiation. The variety of cellular products and the advent of personal communication services and other acronym-heavy technologies will likely confuse consumers even more and make the job of today's telecom companies that much more difficult.

Confusion about bundling will increase as companies begin to try to market two, three or even four different telecom services. Keeping things simple and focused will make it easier for consumers to choose a product, so they won't have to try to figure out the best deal among a dizzying array of service options.

Initially, the future may hold a greater promise for the IXCs that could come out ahead by capturing a greater share of the local telephone market while losing a much smaller share of their long-distance revenues. The IXCs may retain three-fourths of their current customer base while capturing 41% of the local service market. The majority of the local service business captured by the IXCs will go to the big three--AT&T, Sprint and MCI.

In the long run, however, once restrictions have been eliminated, success will be determined by all carriers' ability to meet customers' expectations. While the LECs may have a short-term disadvantage, key players such as BellSouth and Ameritech have capitalized on their strong brand name and regional presence. This will present a significant barrier to potential new entrants. Moreover, the local telcos already have the advantage of a large captive customer base.

There are still many unanswered questions concerning the entire bundling premise. How will residential customers ultimately respond once the IXCs and LECs actively start promoting bundling programs? Which combination of communication services will consumers end up purchasing? What marketing tactics will be used not only to retain customers but also to gain competitive share? Will the smaller telcos end up being squeezed out of the industry altogether based on recent merger activity?

It will be interesting to see how the bundling scenario will play out over the next few years when current plans become reality.

Zaiba Nanji is Director of Telecommunication Services, and Kirk Parsons is Senior Manager of Wireline Services for J. D. Power and Associates, Westport, Conn.