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Bundling For the Broadband Edge

Cable companies still have the lion's share of the high-speed data provider market, as much as 70 percent of the 16 million subscribers in the U.S., according to numerous research outfits.

But pricing pressure from broadband competitors such as Verizon DSL could begin eating into that lead, while satellite players offering cheaper programming packages threaten cable operators' base on which to build broadband services.

Verizon's recent decision to cut its monthly broadband service by $10 to $35 is aimed at cutting into number one cable company Comcast's success with its own high-speed data offerings, which are priced higher in most markets.

At the same time, satellite providers DirecTV and EchoStar are also eyeing expanding into some of Comcast's markets, all the while offering cheaper monthly programming packages.

What are cable companies doing in response? They're offering extras such as telephony services in an effort to reach the coveted "triple play" of three services on one bill: video, data and voice.

Bundling is the way for cable companies to increase per-subscriber revenues and reduce churn, wrote Lydia Lozides, media analyst for Jupiter Research (whose parent company also owns this publication).

In a new report about cable's bundling approach, Lozides said "cable operators are increasingly focusing on the delivery of service bundles combining video, high-speed data (HSD), and telephony services.

"Cable operators benefit from being primary suppliers of video and data services and should continue seeking ways to introduce new bundled services such as telephony."

Lozides wrote that customers are likely to buy telephone services from a cable operator as long as the service is priced appropriately.

At the same time, telcos "remain at a disadvantage for the delivery of video and will remain communication-centric incumbents," her report said.

However, telecommunications companies, despite lacking video services, are equally adept at the bundling strategy.

Verizon, for example, now offers long distance in many markets across the U.S., local wireline service, cellular and a newly-discounted high-speed data service -- all on one bill.

"Comcast's exposure to (regional bell operating companies) RBOC's DSL is considerable," wrote Merrill Lynch media analyst Jessica Reif Cohen in a research note about Comcast. But she also stressed that, although Verizon and SBC's operating markets overlap with Comcast's by 77 percent, "the impact has been minimal to date." The reason is that Comcast has been able to cross-sell high-speed data services as it signs up cable customers.

High speed data is a great product in Comcast's bundling strategy, said Cohen, because it offers high monthly revenue per subscriber, a high cash flow margin of over 40 percent, and, when bundled with other products, a lower churn.

In addition, she noted that cable data service is ubiquitous in rebuilt markets compared to telcos "somewhat limited coverage," while Comcast also has 2,000 retail partners helping to sell the broadband service.

Plus, Comcast has slowed the customer churn from its AT&T Broadband assets by offering a satellite broadcasting customer "win-back" program, in which it offered to essentially "buy back" satellite dishes from customers by extending $400 worth of credit over a year and a half to the customer.

The program "appears to be effective in luring subscribers to take a bundled service, and on average, roughly 40 percent of new subscribers are taking two to three products," Cohen noted.

More importantly, for the RBOCs, the cost to provide coverage to more than 60 percent to 70 percent of their lines has been uneconomic, Cohen noted. However, Adam Quniton, Merrill Lynch's Telecom analyst, said new technology coming on the market for telcos may reduce the cost barrier.

Telcos aren't exactly sitting on their hands either. SBC Communications said this week it may spend up to half a billion dollars in order to expand its DSL territory. A spokesman for the Baby Bell told internetnews.com that the company is committed to maintaining its "leadership in terms of DSL deployment and subscriptions." SBC, also an RBOC, operates in 13 Midwestern and Western states.

Verizon also plans to expand the number of its phone lines equipped for broadband access by nearly 30 percent as part of its goal to make DSL service available to 10 million homes by the end of the year.

And Denver-based Qwest plans to expand its own DSL reach by another 20 percent.

Comcast has responded to the competition by upping its own subscriber estimates, announcing during an earnings discussion that it expects to add between 75,000 and 100,000 new cable subscribers by the end of 2003 to its 21.3 million cable base.

Right now the company counts 4 million high speed data customers, counting the AT&T Broadband systems that it added to its original Comcast broadband base of 1.7 million subscribers.

It also said it expects to sign up 200,000 more broadband subscribers than it expected, which would bring it to 5.2 million by year's end, provided that Verizon, SBC and other competitors don't steal some customers with their own bundling strategy in what is shaping up to be a looming broadband price war.