Skip to main content

For Telcos, It's a Bundle, Baby

Digital subscriber lines and long-distance lines are up. Residential lines are down. And video is on the way. As the cable industry looks to add voice-over-Internet protocol telephony to its suite of double-play products, the regional Bell operating companies are looking to ramp up their multiple-product bundles. Case in point: last week Verizon Communications Inc. announced it would begin offering DirecTV as part of its package in Rhode Island, starting Feb. 3

"The goal is to drive growth in the bundle," SBC Communications Inc. chief financial officer Randall Stephenson said on that telco's earnings call last week. Also on that call, the telephone company reported it lost 3 million access lines in 2003.

But the rate of decline slowed throughout the year because SBC kicked up DSL marketing and launched long-distance service in many regions, he said. In fact, DSL gains were up 38% in SBC's Midwest region in the fourth quarter, Stephenson said — far surpassing other regions of the company because of the long-distance launch.

"The driver was long distance," he said. "It gives us a chance to talk to customers in a whole new context."

Overall, SBC added a record 378,000 DSL subscribers in fourth-quarter 2003, a slight sequential gain over the 365,000 additions in the third quarter.

SBC also reported that 44% of its subscribers now take the bundle, compared to just 19% a year ago.

BellSouth Corp. added 126,000 DSL subscribers in fourth quarter 2003, a 13.5% sequential increase and 43% year-over-year increase.

"The results were strong and continue to be strong with FastAccess," said Ron Dykes, chief financial officer. FastAccess is BellSouth's sub-$30 DSL pricing package.

Dykes also said the company introduced a $4.95 per month dial-up package to long-distance subscribers during the quarter. It was designed to create a feeder pool for future DSL additions.

More than 24% of BellSouth customers take the bundle, compared to just over 10% a year ago. "BellSouth Answers reduces churn for high-value customers," Dykes said.

And more bundling is on the way, as both RBOCs plan to launch co-marketing campaigns with direct-broadcast satellite subscribers in the first quarter.

"We're on track to launch video in the first quarter, and we plan to aggressively bundle it with our other services," said Stephenson.

Although the rollout of EchoStar Communications Corp.'s Dish Network DBS service will dilute SBC's earnings, those losses will be made up by decreased pension costs for the company.

SBC is finishing up system-integration work with billing, ordering and customer service, and plans a soft launch with EchoStar this month, prior to a hard launch in March, he said.

In a research note, Merrill Lynch analyst Jessica Reif Cohen estimated that SBC would add 330,000 to 500,000 subscribers from its EchoStar video bundle in 2004.

"Assuming 35% to 50% of the projected loss is related to the Dish push, this implies pretax startup losses of $200 million to $300 million mainly for subscriber-acquisition costs," she wrote. "If [acquisition costs are] $600 per subscriber, this implies SBC's internal hurdle is 330,000 to 500,000 subscribers."

Dykes said BellSouth is completing tests of its co-branded DirecTV service with employees and will begin Web access ordering in the first quarter. In the second quarter, he said, other traditional in-bound sales channels will be added.

"We see this as a way to supplant cable services and cement our access-line business," he said, since BellSouth's consumer access lines fell 7.3% in 2003.

Those access-line losses are affecting the RBOCs' top and bottom lines. SBC's fourth-quarter revenue dropped from $11.2 billion last year to $10.3 billion this year, largely due to residential access line losses. Net income in the fourth quarter 2003 was $905 million, compared to $2.4 billion in the year-earlier period.

Verizon said it added 203,000 DSL subscribers in the fourth quarter, giving the Baby Bell 2.3 million high-speed subscribers in total. The RBOC said Rhode Island subscribers could save $20 a month with a bundle of long-distance, local, DSL and DirecTV, versus the comparable package from the competition. (Analyst Richard Greenfield, of Fulcrum Global Partners, pointed out in a note that the comparison omits a Cox three-product bundle that takes another $10 off the cable price.)

Verizon said it would roll out DirecTV in bundles to parts of New England and the Mid-Atlantic states in the coming months. Verizon said some 48% of all subscribers are now in packages.

The shift to broadband also has also affected EarthLink Inc. The company reported EBITDA of $36.5 million in the fourth quarter on revenue of $348.6 million. Narrowband revenue dropped 10%, year over year, to $230.4 million, while broadband revenue grew 36%, year over year, to $98 million.

EarthLink said it added 248,000 net new subscribers in the quarter, including 108,000 broadband subs. Overall, the ISP said it had 4 million narrowband and 1.1 million broadband subscribers.

As for 2004, SBC said it expects to add 1.5 million DSL subscribers in 2004, as it increases its DSL coverage area from 75% to 80% and expands the number of retail outlets by 2,000 stores. In 2003, SBC added 1.3 million subscribers, to total 3.5 million high-speed subscribers.