Why The Bundling Battle Is Escalating

Bundled services are here to stay. Cable operators that have gone digital can offer multichannel video, Internet and Voice over Internet Protocol (VoIP) services. To compete, satellite TV services are teaming with telephone companies to match those capabilities and sometimes to trump them.

One shining example is El Segundo, Calif.-based DirecTV Inc.’s budding partnership with Atlanta-based Bell-South [BLS]. The strategic alliance is showing early promise, and both companies stand to benefit immensely from the ambitions and innovations of the other.

BellSouth, a regional telephone company that operates in nine states in the southeastern part of the country, chose DirecTV as its partner to offer bundled video, voice and broadband services in large part due to the satellite TV provider’s exclusive football programming. The football-loving south has been most receptive to the bundled services.

In just a handful of months, BellSouth already has amassed 90,000 subscribers who have agreed to take bundled services that include a combination of DirecTV video with BellSouth wireline and Internet connections as well as cellphone services from Cingular Wireless LLC, a joint venture between BellSouth and SBC Communications [SBC]. BellSouth announced last week that 4 million of its customers now subscribe to one form of bundled services or another. For that reason, it appears the BellSouth- DirecTV alliance has plenty of room to grow to the mutual benefit of both companies in the southeast.

An example of how BellSouth is benefiting from DirecTV is the satellite TV company’s willingness to pay $3.5 billion to extend its existing contract to carry “NFL Sunday Ticket” for five additional years through 2010. That pact with the NFL gives BellSouth something special to use in its promotion of bundled services. So far, the NFL programming has been a “real gangbuster,” Jim Rozier, BellSouth’s senior director/ video services, told me.

DirecTV is gaining a marketing boost in the southeast from BellSouth, which is offering generous discounts to customers who bundle video into their existing services. BellSouth customers who sign up for the newly offered bundled service receive between $200 and $300 worth of free programming that includes “NFL Sunday Ticket.” A monthly programming package that normally would sell for $90 was discounted to $62.25. In addition, “NFL Sunday Ticket,” priced at more than $200 for the full season, was offered for free.

“Customers were flocking to that offer,” Rozier told me. “We integrated it into our marketing and our management. We made sure that our management had buy-in.”

DirecTV’s management certainly has buy-in, too, in light of the company’s $3.5 billion commitment to extend and expand the rights to carry all the NFL games for an additional five years.

Aside from sports programming, BellSouth also will receive a boost as DirecTV rolls out local signals to additional markets throughout the southeast. The latest such move occurred last week when DirecTV added Charlestown, S.C., to its list of Designated Market Areas (DMAs) that can receive local signals to supplement the national channels that DirecTV provides. BellSouth now is able to offer bundled services that include DirecTV’s digital video to customers in that market. The local broadcast channel package is available to consumers in combination with any DirecTV “Total Choice” programming package. The combined programming package is available for $39.99 and offers more than 130 channels. BellSouth also is offering its customers a chance to save as much as an additional $10 off the price of bundled services when they add DirecTV service to their existing “BellSouth Answers” package. DirecTV management surely must like that kind of support.

However, time is of the essence for satellite TV and telephone companies to strike bundling arrangements with each other to compete effectively with digital cable operators. The cable industry has spent more than $85 billion since 1996 to upgrade plant and equipment from analog to digital technology. And cablecos last week received regulatory support in offering VoIP services from a Federal Communications Commission (FCC) decision. The ruling found that the VoIP telephony service offered by Vonage Holdings Corp. is not subject to traditional state public utility regulation, but only national oversight from the FCC. The ruling will allow cable to expand its bundled service initiatives much more quickly in the future.

The first shots of the bundled battle have been fired, and each side is on the march to win the hearts and pocketbooks of consumers before the other.