Building a better bundle

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Are more and more cable subscribers ready to open up their homes to a bundle of joy?

While the joy might be best taken up with customer-service departments, the bundle -- a package deal that includes some combination of video, broadband and telephone services -- has been an undeniable success for the cable industry over the past three years, working as both an engine for economic growth and a catalyst for technological innovation. The industry's capability to bundle such services into the so-called "triple play" goes a long way toward explaining why what used to be called "cable TV companies" are now more commonly referred to as MSOs, or "multiple system operators." Its no simple feat of marketing, but the result of a $100 billion investment in infrastructure in the 10 years since the Federal Telecommunications Act of 1996 opened the door for the expansion of cable services. And realizing the potential of these services will be the subject on everyone's mind at the National Cable and Telecommunications Association's 2007 Cable Show, which takes place Monday through Wednesday at the Mandalay Bay Convention Center in Las Vegas.

At the beginning of 2006, the U.S. market was home to 65 million basic cable subscribers, with 25 million homes receiving high-speed Internet access over cable and another 6 million homes receiving digital phone service from a cable provider. It's hard to know the precise overlap of those numbers, but customers signing up for a two- or three-part bundle of services are a steadily increasing share of the market, and triple-play customers typically register at half the churn rate of single-play customers. At Time Warner Cable, triple-play customers have doubled over the past year, from 7% of the company's subscribers to 14%. And when customers with a two-part bundle are added in, close to half of all TWC subscribers are in some kind of bundled relationship with the company. That growth is in keeping with trends at other major cable companies, and across the industry, the triple-play bundle has come to represent the industry's desire to reposition itself beyond television.

"Bundling has been a real spur to growth for the cable industry," says Rob Fortino, director of cable and wireline accounts for Telephia, a consumer research firm. "What bundling does is put MSOs in the consciousness of the public, not just as TV providers but as communication service providers. It's a great way for them to leverage the market position they've earned with television services. It's also an elegant way for them to become full-service communications and entertainment companies. It's not just cable TV plus phone plus broadband -- it's 'We're a full-service provider.'"

When bundled triple-play offers first became available, the appeal to consumers was that when they signed on for additional services, the combined services were obtained at a discount compared to what they would cost individually. Consequently, billing was simplified, with statements for all three services arriving in the same envelope. Overall value and the simplification of one installation process and one bill are still strong attractions to the bundle, but what MSOs are beginning to emphasize are the cross-platform capabilities of bundled services.

For that reason, some in the industry see the term "triple play" as a bit of a reductive misnomer because sophisticated technology has made the bundle not simply an aggregation of television, phone and Internet but a kind of integrated "three-by-three" network, in which each service can function seamlessly with the other two. In practical terms, that means that cable bundles can now -- or will soon -- offer such enhancements as caller ID on the TV screen, the ability to hear voice mail while checking e-mail or the ability to program one's DVR over the phone.

"There's a lot of technological hocus-pocus involved behind the scenes that consumers aren't really interested in," TWC chief marketing officer Sam Howe says. "That's not what attracts people to the bundle because the essence of the bundle is simplicity. It's not just a matter of mashing together three services but of providing converged services that string the bundle together in ways the customer might not expect but can work with very naturally. We are going to continue to add enhancements to the bundle, but we don't want to add things that sound good but are actually difficult to use. If there's a battle of the bundles, it's often around the value first -- what price point are you at? But at the end of the day, what makes people stick with a bundle is not so much the price point but the fact that it's simple and satisfying to use the service."

Even as bundle capabilities expand, it is sometimes an unbundled marketing message that works best to bring in new customers. Cablevision was the first major provider to offer a three-part bundle of services back in 2004 and has put together 11 consecutive quarters of growth partly by stressing its individual "Optimum" digital cable, voice and online bundle components.

"We made a decision in June 2004 that instead of pushing the full bundle for around $100, we thought that it was important to position each of the products individually at $29 a month," Cablevision senior vp marketing John Hargis says. "Someone that has no service today from a cable company might think that $100 a month sounds like a lot, but the value of the three products registers."

Since MSOs serve geographically distinct areas, their competition is not with each other but with telephone companies, who also have gotten into the bundling game by packaging phone service with DSL connections and TV hookups, either in partnership with a satellite service or through their own IPTV solution.

"Our competition has been the same for years -- phone companies and the satellite companies," Comcast senior vp marketing Marvin Davis says. "In terms of the bundles, there are competitive products out there, but for the most part, they are patchworked together. What makes ours so appealing is that you've got three strong products from one company. We're in a strong position right now because in this window of time, the only way you can get a true triple-play bundle (is) from a cable provider."

Some industry watchers believe the cable industry should do all it can to take advantage of this particular technological moment. "They need to grab phone share before the phone companies grab TV share, and so far they have," says David Joyce, media equity analyst for the Miller Tabak trading firm. "Over the last couple of years, there have been more cable modems added to homes than DSL connections. There's more overall industry penetration to come in terms of digital video and cable modems, but I think the cable industry has the ability to really grab share right now -- they've got the natural bundled offer capability with flexibility to meet what a customer wants."

Figuring out how to keep customers happy might be the biggest challenge facing bundle providers. "There are so many appealing aspects to a bundle package," says Ned Sherman, CEO and publisher of Digital Media Wire. "But there's also a lot of confusion among consumers about the services being offered and frustration about getting what they want. Part of the cable industry's role is going to have to be as an educator, bringing the consumer up to speed on what the options are."

Howe hopes to get one simple message across to customers. "People get confused that since bundling involves technological advancement, the people who go into bundles have to have some special technological savvy. Nothing could be further from the truth," he says. "When you look at our bundle customers, these are people who have lives that they are trying to make less complicated -- not more technological. The bundle customers want it simple and want it to work."
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