A Different Kind of Price War

Operators disagree over big discounts for cable and phone "bundles"

There's a cable price war going on, but it's not just an attack on DBS and telephone companies. It's a fight among cable operators. Cablevision Systems startled industry executives last month by offering huge discounts to customers who took its "triple-play" bundle of video, high-speed data and newly launched telephone service. Three products, $30 each, totaling $90 monthly.

That's 32% off what Cablevision's existing cable customers are paying, including a fat 43% discount for video.

Cablevision's stock got hammered over fears of the financial effects of the promotion and what it says about the company's confidence in its business. Cable operators puzzled over how Cablevision could afford such a drastic pricing move or why it seemed necessary.

That sounds crazy—except to Cox Communications. The No. 4 cable operator is quietly making an almost identical offer.

Fulcrum Capital media analyst Richard Greenfield discovered that, in Cox-served cities in New England, new customers could get the same pricing and packaging as Cablevision's. The major difference is that subscribers lock in Cablevision's price for 12 months but Cox's deal is only for six.

Other cable operators don't think much of the marketing ploy. "We think that's a very slippery slope," says Time Warner Cable Chief Marketing Officer Chuck Ellis, adding, "If we all get into a pricing commodity war, there's very little payoff for anyone."

Cablevision declined to talk about its aggressive bundle offer in detail.

Disagreement over selling cable's hallowed bundle will be a central topic at the annual convention of cable executives at the Cable & Telecommunications Association for Marketing (CTAM) in Boston this week. Operators see bundling of services as the key to keeping customers from defecting to DBS's video service and telcos' high-speed DSL Internet services. (In some markets, DBS operators are making deals with phone companies for their own packaged deals.)

Clearly, if customer service is strong, bundling services makes customers extra loyal. The trick in pricing is to make the discount big enough to draw customers, make jumping ship expensive, but keep profits as high as possible.

Cox President Jim Robbins recently told investors that the bundle is such a high priority that his systems are spending "99%" of their marketing efforts to push it. "The reason for that is, very simply, bundled customers are more satisfied customers—we have lots of research data to support that—and bundled customers churn less," he said. "They are, far and away, our most valuable customers."

Only a couple of operators are able to offer the full triple play. Cox has offered it in its biggest markets for more than three years, deploying conventional circuit-switched technology. Comcast has halted sales of the unprofitable circuit-switched phone operations it inherited in acquiring AT&T Broadband. Insight Communications offers phone service but has slowed deployment because Insight's partner Comcast was handling a lot of the operation.

Bundled phone service will soon be widespread, though. Cablevision waited for a less expensive technology: VoIP (voice over Internet Protocol). Since last fall, the company has offered "digital telephone" across its entire 3 million-subscriber footprint on Long Island and in New Jersey, Connecticut and part of New York City.

Time Warner has scrapped its small move into circuit-switched service and started deploying VoIP service in 13 markets, planning to sell it in every system by year-end. Other operators will follow suit over the next two years.

For years, customer churn has been about 20% a year (not counting customers who move). Companies have found that offering video and data together reduces "controllable" churn by 15%-20%. Throw in a third product and churn drops 40%-50%

Surprisingly, cable operators say offering discounts is important but not necessarily a deal-maker. According

to Randy O'Neal, Cox's director of bundling and video product management, research shows that product quality and convenience are actually more important to consumers than simply saving money. That's echoed in a recent study by CTAM (see box).

A simple pitch and selling process are essential. "A $99.95 bundle is a great, huge discount," O'Neal says. "But if a customer has to be transferred to three different people, one for each product, that sale is not going to get made." Some cable operators learned that the hard way.

In promoting its bundle, Cox tends to focus less on price, touting bonus products instead. The company likes to talk about throwing in free long-distance service or pay-movie services. "Anything that allows us to say 'free,'" says O'Neal.

Time Warner has a slightly different strategy. Instead of touting the bundle in ads and mailers, Ellis says, the No. 2 operator draws customers in by promoting one product, then upselling customers once they get on the line.

It lacks the big splash of the Cablevision offer, but, says Ellis, "I don't think what I'm describing means slow growth. It can be dynamic growth."

Cox's special bundling offer has been pitched to consumers only in markets where telcos Verizon and SBC have been exceptionally aggressive. Each has teamed with a DBS company to offer its own bundle of voice, video and data. Cox's O'Neal says deep price promotions will be less common but "we will always do customer promotions to get the phone to ring."

So will phone companies. Local phone service offered by cable operators is stealing their core business, backing them into a corner. And, as telcos ally with DirecTV and EchoStar, cable operators may not be able to avoid widespread, dangerous price wars for long.

What Callers Want
In a survey, consumers said these issues were "absolutely essential" in their selection of a phone company:
Total adults Cable subs DBS subs
Source: CTAM
Quick, reliable access to 91174%74%77%
Service available anytime needed66%65%65%
Bill accurate and easy to understand63%63%67%
Calls go through every time placed60%61%64%
Pay for just what is used59%58%60%
Low cost58%57%62%
Company that is known and trusted58%59%59%
Works during blackouts56%57%54%
Single local/long-distance bill45%46%50%