Bundles of Joy: Playing Lowball
Charter high-speed Internet customers were tempted last week with an offer worth phoning home about: unlimited local and long-distance calling for $19.99 a month. Twelve months later, the price creeps to $39.99 a month.
It made phone service through a cable company sound attractive (no equipment to buy, no installation costs), non-restrictive (calls to Canada and Puerto Rico were included), and inexpensive.
Soon after, AT&T countered with a phone/data budget play of its own – a basic local phone line (no long-distance calling included) for $13 a month. And that price was permanent, the company said. Also advertised was a basic DSL service (384 Kbit/s to 1.5 Mbit/s downstream; 128 Kbit/s upstream), that could be bundled with the basic phone line for an additional $14.99 a month.
The basic DSL price wasn't permanent. After 12 months, it would go up to $19.99 a month. But AT&T's rep made the point that if a customer made it clear that they were switching from a cable-based service, the carrier would deliver the first three months of service at no charge.
So, AT&T is willing to settle for getting about $135 out of a new DSL customer for the first year. In 2004, the same speed of service typically ran a new customer about $420 a year – $19.95 for the first three months and $39.95 thereafter.
Both Charter's and AT&T's offers are interesting because they do what's becoming very popular in consumer bundling: They offer a big discount, and time-specific terms, to new customers. Once the honeymoon is over, the rates go back up, and, again, customers are tempted to change providers. (See LR Poll: Bundles Begone!, Costly Cable, and Telco vs Cable: The Rematch.)
Is that so wrong? Well, it could be. Business experts say that when companies get in the game of low-balling each other just to get some new customers, it eventually erodes the value of the services they sell, and everyone loses.
"You're attracting the wrong kind of customers," Bill Cron, a marketing professor at TCU's Neeley School of Business, says of these bottom-feeding bundles. "And that's potentially destroying the industry."
While cable and phone companies scour the Earth for deal-hunters, the barons of bundling aren't rewarding existing customers for years of loyalty. "Everybody expects something extra for being loyal," says Cron. "Yet, in some of these programs, all you get for loyalty is that you're charged more."
Is there a way out of this?
The argument for bundling is supposed to be that buying more things from one company makes it harder for customers to leave. And not having a bundle of services can be detrimental, too, because it can hamper a firm's ability to compete. (See Vonage: Burned by Bundles.) But the communications biz is so cut-throat that phone and cable companies have little choice but to try and attract each other's bottom feeders to replace the loyal, more profitable customers that finally leave after years of neglect.
TCU's Cron contends that the net margins of telecom providers are so razor thin that they can no longer afford to provide the kind of service that makes people into loyal customers in the first place. "The industry went down a path that it now can't get out of," he says.
Scott Clavenna, chief analyst at Heavy Reading, wrote a while back that technology is only the first battlefield where the phone and cable companies square off. "The real challenges lie in the marketing, the fulfillment, the brand recognition, and customer faith," Clavenna wrote. (See Video Over Déjà Vu.)
While carriers face those "real challenges," we'll chronicle their successes and failures in this space during the coming months. In the meantime, send us your best bundling deals, your junk mail, and your customer loyalty horror stories so we can get a good discussion going around whether bundling will help the industry stay afloat or if it will choke what goodwill it has left.
— Phil Harvey, News Editor, Light Reading