The Best Way to Bundle

I read an interesting quote recently in an article written by Mike Dano of FierceWireless. He interviewed Ronan Dunne, the EVP of Verizon Wireless. He quoted Mr. Dunne as saying, “In competitive markets, and the U.S. is one, if you’ve got real choice in the individual products, the cost of bundling is that you end up taking the second-best wireless product and you map it to the third-best TV bundle in order to get the cheapest broadband connection or fiber connection. No wonder you get $5 off at the end of the bill,

That statement is a perfect lead-in to talk about the different ways to bundle. Mr. Dunne was referring to bundles like the one that AT&T does with DirecTV to try to get more video customers. That AT&T bundle is similar to what we see from most of the big ISPs. I wouldn’t even label these efforts as bundles, but rather as marketing specials that are designed to lure customers to buy specific product sets.

And Mr. Dunne is right. If you go to the web pages of all of the big ISPs you will see their pages splashed with really low-cost sounding specials. By now most people have figured out that the price for these specials increases at the end of the special term. And often people have found out that even with these specials that the actual price paid is higher because the ISP will load up these specials with all sorts of extra fees and charges that were not described in the advertising.

But Mr. Dunne is making an even more important point in that these specials end up luring customers to buy the smallest and least profitable products that an ISP sells. In order to get a cheap web price the ISP will pair their slowest broadband product with a small cable TV package. When customers contact the company to buy this special the customer service rep answering the phone then has an uphill battle to talk the customer into anything better – because they already have the advertised low price in mind when they call. Mr. Dunne went on to say that this kind of bundling is not attractive to Verizon wireless and that they would much rather sell premium products at a fair market price.

My clients face this same dilemma all of the time. I have some clients that take the exact opposite approach. They list all of their possible packages on the web, including those that might cost over $150 per month. But companies that do this face the opposite problem in that the high prices on the web might drive customers away from buying what they really want.

Many of my clients don’t post bundled pricing on their web sites for these exact reasons. They don’t want to lure people with false specials and they don’t want to chase customers away by talking about high prices. I see these clients taking several different approaches on how to handle bundling.

Some provide a discount for buying multiple services. For instance, they might discount $5 when somebody buys two products and $10 when they buy three. I’ve never particularly liked this kind of discounting for a few reasons. First, if a customer does buy your lowest margin products, such as your smallest cable package and a basic telephone line, then this discount might be giving away most of the margin on those small products. Another customer that buys the two highest margin products would get the same discount. I also don’t like the message that sends – it says that in general your products are overpriced.

I have other clients that don’t give any bundling discounts. They try to right-price each product on a standalone basis. They are not afraid to tell this to their customers and they take pride that they think each product is a bargain at the price they sell it at. I like this approach because I like the math. If a company ends up giving some sort of bundling discount to most of their customers then they have given up margin on every one of them. If you do the math you’ll see that you’d make more money with no discounts even with significantly fewer customers. A $10 bundling discount is giving away $10 of bottom line margin, which for most ISPs is a significant amount.

I’ve always asked clients who give big bundling discounts if they think they are saving any money when customers buy multiple products. The answer I get back – when they really think about it – is that they don’t save much. I think a lot of small companies bundle because the big ISPs do it and they think it’s the only way to do business. But I look at companies like Google and many of my other clients that don’t bundle and I see them getting similar market penetrations as my clients that offer bundles.

There is no question that it’s harder to sell without the bundle. It largely means that a sales call with a customer needs to be consultative and a good salesperson will ask a customer to define what they really want before talking price. Then, if the price is too high they will work with a customer to find a compromise they can live with. This kind of sales approach is going to sell a lot more of your premium products. And it’s going to make customers better understand just what they are buying. I think a lot of the customers that buy the cheap advertised bundles are not really happy with their products and are likely to churn at the end of the contract. What they really might want is faster data speeds or more TV channels, but when they start the conversation with the ISP based upon getting the lowest price that real desire gets lost in the transaction.

The main point of this conversation is that ISPs really need to examine their bundling practices. Just copying the big companies might mean giving away a lot of bottom line needlessly. And offering big discounts to new customers might not be adding many new customers after considering the churn and loyalty from customers who only buy due to the specials.

 

The Economics of Tower Transport

Many of my clients lease towers and/or fiber transport to reach towers to wireless companies. Since most of my clients operate last-mile networks this is not usually a major source of revenue for them, but it is a significant one, and one of the more profitable things they sell.

I have been advising clients that we are in the midst big changes in the cellular industry and that they should expect payments for cell tower connectivity to start dropping. Transport providers and cell tower owners that won’t renegotiate lower prices could risk losing the business entirely.

Let’s look at AT&T as an example of this. AT&T has been aggressively pushing its vendors to lower prices. At an investor meeting last year AT&T’s president of technology operations told investors that the current industry model is not sustainable. And he is right. As I wrote in a recent blog the entire cellular industry seems to have crossed the threshold where cellular service is becoming a commodity, and that is putting huge pressure on the cellular companies to reduce costs.

Last year FierceWireless posted a letter that AT&T sent to many of vendors telling them to expect to renegotiate rates and terms. In that letter AT&T said that they would pushing for early termination of existing contracts with the expectations of lowering fees. They said they would be looking for the ability to modify or upgrade existing towers for free. And they want to eliminate any automatic price increases and instead have “rents reduced to competitive rates”.

There are two major costs for a cellular company to use somebody else’s tower. First they must lease space on towers including paying for power and space underneath to house equipment. Where AT&T doesn’t own the fiber connecting to the towers they also have to pay for fiber transport to reach the towers. And that transport is not cheap because the bandwidth they need at towers is growing at a torrid pace. Where just five years ago there were very few towers that needed more than a gigabit of bandwidth, I’ve seen rural towers where the carriers are now asking for the right over time to grow to five gigabits. And everything I read about cellular data usage tells me that demand for bandwidth at towers will continue to grow rapidly.

Many of my clients operate in rural areas and some think that their physical isolation makes them immune from any price negotiations with the wireless companies. But I think they are wrong for several reasons.

  • First, I think a lot of the billions being spend by the FCC’s CAF II program is being used to construct fiber to rural towers. AT&T is spending a most of the $2.5 billion from that program to extend fiber into rural areas. And where they build fiber they won’t need to lease it from anybody else.
  • I also suspect that the cellular companies are working with Frontier and CenturyLink, the other two big recipients of CAF II money to piggyback on their fiber expansion to reach cellular towers at a lower cost.
  • Both AT&T and Verizon are also undertaking significant fiber expansion, with one of the goals of that program to cut transport costs. I believe they are doing the math and that they will build fiber to the towers that save them money over the long-run – with those places with the most savings at the top of the list. If they sustain this kind of construction for five or ten years they will eventually be able to bypass most of the towers that they lease today. And the cellular companies should be doing this. If there are going to be lower margins in the cellular business then they ought to use their capital, while they have it, to permanently reduce operating costs.
  • I also suspect that, while AT&T and Verizon are competitors that they are cooperating to reach the more rural cell sites and have transport swap plans in place that save them both money.
  • Finally, these companies have been buying fiber network providers, like Verizon’s purchase last year of XO Communications. It would not be surprising to see them continue to buy companies that provide cell site transport.

The cellular companies and their partners don’t communicate well with smaller transport and cell tower owners. I suspect that many of clients will only get an inkling that a cellular company is going to bypass them when they get the cancellation notice of their contracts. So I have been encouraging folks to reach out to the cellular companies to renegotiate terms and prices. I think that those willing to so might be able to keep this as a long-term revenue stream, but that those that want to stick with higher historical prices will eventually get bypassed and will lose the revenue stream altogether. It’s a tough call, because some places are remote enough that they may never be bypassed – but it’s a crap shoot to guess if your own region is on the fiber-expansion list.