Unwrapping the Bundle

Telcos Tout Retention Factor, But Packages Reduce Profit Margins

The biggest U.S. phone companies posted third-quarter results that failed to buck the trend of declining revenue in their core operations. Eager to reverse this trend, most phone giants have introduced various discounted bundled packages incorporating such services as local and long-distance voice, wireless and Internet access; and satellite TV may be the next major component of the bundle. While early results provided by the companies show the discounted bundles have assisted in the war to stem attrition, analysts say it is too early to judge their ultimate success.

At Verizon Communications Inc., few customers purchasing a Freedom bundle leave on a year-to-year basis, says the company. “Churn rates among Freedom customers are phenomenally low. It’s like less than one percent,” says Verizon spokeswoman Christy Reap, who declines to reveal how many customers have purchased a consumer bundle.

In the third quarter, SBC Communications Inc. posted weaker revenue and net income compared to the period a year ago, with its results reflecting a continued loss of access lines. Net income of $1.2 billion shrank 29 percent from the period a year ago. But in states where SBC is authorized to provide long-distance service, consumer retail lines lost in the quarter were 40 percent lower than in the third quarter of 2002. SBC expects results to improve across the Midwest, where it received FCC approval late in the third quarter to provide long-distance service in Illinois, Indiana, Ohio and Wisconsin.

BellSouth Corp., SBC and Verizon — the biggest local phone companies — now have authority to provide long-distance service throughout their entire incumbent phone territories. Long-distance phone service is considered a key component of the consumer bundle.

However, sales of bundled packages are bittersweet on the balance sheet, according to one financial analyst. “While churn rates have been reduced, [Bell] profit margins are falling under pressure,” Roger Sachs, CFA of Cathay Financial, says in an October research report. “In an effort to reduce local churn, SBC has aggressively provided high-speed data and long-distance service at the expense of profitability.”

Danny Briere, CEO of research and consulting firm TeleChoice, agrees, noting there is nothing unique about the consumer bundled packages currently being offered. Instead, he says, the phone giants are simply packaging generic services and offering consumers a discount, rather than leading with a unique offer, such as a single voice mailbox. The companies are simply shifting minutes around, he says. “These guys are just heading towards lower profit margins,” Briere says. “Price wars are going to break out.”

Daryl Schoolar, senior analyst with In- Stat/MDR, considers the triple play “a limited strategy,” adding that consumers can find separate deals comparable to discounted bundled packages. The analyst says he put together his own “triple play.” Schoolar purchased Cox local phone service with broadband access, which included a $10-a-month Internet discount. He chose AT&T long-distance because it was cheaper than Cox, and signed up with DIRECTV for satellite TV services because he got a sweeter deal than he would have through Cox. “I think we haven’t seen enough long-term evidence to really see” if bundles will stop churn and increase loyalty, the analyst says.

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