A cellular component is showing up in more and more service bundles -- and should help telcos make inroads against the cable companies that now dominate the multiplay arena.

In an era when service providers are no longer measured by their total lines or subscribers, the star performer today is the one that can garner the most revenue generating units. The term, used in both telecom and cable, reflects the importance of bundled service packages, which may include voice, video, data and, increasingly, wireless.

In the new math of the communications industry, a customer who takes any two of these services from the same provider counts as two RGUs, a customer who takes three counts as three RGUs, and so on. To date, cable companies have outpaced telcos in the RGU game. As Piyush Arora, industry analyst for communication services for Frost, noted, “A lot of cable companies have more than 50% of their customer base taking at least two or more services. For telcos, it's probably more like 40% to 45%. For the market as a whole, triple-play penetration is about 11.1% — but the cable companies are above 11%, and the telcos are below.”

Telcos now hope to change this by leveraging their own wireless businesses to deliver more ambitious service bundles that include a wireless component. Cable companies don't have wireless assets of their own, but major cable companies — including Advance/Newhouse Communications, Comcast Corp., Cox Communications and Time Warner Cable — have formed a joint venture with Sprint to deliver bundles with wireless.

The last 12 months have seen significant activity in this area for major telcos and cable companies. In January, AT&T announced its Unity plan, which offers savings to its customers who buy both wired and wireless service. AT&T customers also can purchase combinations of two, three or four services as part of the company's Double, Triple and Quad Pack bundles. Also in January, Verizon added wireless to its service bundles, which are sold under the Freedom moniker. Meanwhile, cable companies have been introducing bundles since late 2006 that leverage Sprint wireless services — although, to date, those launches have been limited to specific markets.

From the consumer's point of view, wireless is growing in importance. Just under 7% of households in a recent IDC survey said that cellular would have to be included as part of a bundle to make it appealing to them — up from 2.2% who gave that answer a year earlier.

Verizon's Freedom line has “exceeded every expectation we had in terms of sales,” said Maria Malicka, director of product line management for bundled solutions for the carrier. “Sales are more than double what we expected.”

The offerings — which include combinations of two, three or four services — are attractive to customers because of their value, Malicka said. “Customer perception of whether or not they truly get the value is their No. 1 driver in selecting bundled services,” she added. “When they select some products, they may get a short-term promotion, then when they actually get the bundle, they realize the savings isn't what they expected. With Verizon, they're finding that the savings they're getting is the savings they were expecting.”

All Verizon bundles include unlimited wireline voice service. The cost of a double-play offering that includes wireless is $69.99 to $79.99 a month, while a triple-play bundle that adds high-speed Internet runs between $94.99 and $104.99 monthly. The wireless component of all Freedom plans includes 450 monthly anytime minutes, along with unlimited night and weekend minutes and unlimited calling with any other Verizon Wireless customer.

A quadruple play that includes Verizon's FiOS advanced video offering, or DIRECTV where FiOS is not available, costs $134.99 to $144.99 a month. The company also offers double- and triple-play bundles without wireless, although Malicka noted that more than 50% of customers choose bundles with a wireless component. Freedom plan customers receive a single bill for all services, which they view as a convenience, Malicka said.

Malicka is even more enthusiastic about the future of bundled services as Verizon begins to offer truly converged wireless and wireline offerings. Although declining to provide details, she said Verizon will begin offering some converged capabilities this year.

She also hinted that those capabilities might include a cost-saving component. “Customers don't want to worry that this plan has this number of minutes and this plan has unlimited minutes,” she said. “They want to come to a company like Verizon and say, ‘I want voice communication at home and away and have it all interchangeable so that when I call my house, I don't have to worry about using up my minutes.’ We're looking at making it a non-issue for customers.”

Verizon's eagerness to add that capability is not surprising because AT&T and some cable companies already support it. Verizon has trial-marketed the capability in Florida and Texas and will offer it more widely soon, a spokeswoman said.

Enabling wired and wireless devices to function in a similar manner also will be a likely goal for Verizon moving forward, Malicka said. “When I'm using my cell phone or a stationary phone at home, they should have similar features that should be interchangeable,” she said.

Cable companies have a different take on the role of wireless in bundled service offerings.

“We don't think as much about a fourth product,” noted Mike Roudi, vice president of wireless for Time Warner Cable, which offers Sprint's cellular service under the Pivot brand as part of a multiplay bundle in several markets. “We think about it as adding wireless as a feature to our other three products.”

That philosophy is reflected in the pricing of Time Warner's multiplay packages. Voice, video or data customers who sign up for the Pivot cellular service from Sprint pay the same monthly rate they would pay to buy the Sprint service on its own. But they do get extra capabilities, such as an integrated voicemail box. If desired, customers can set up a single voicemail box for both wired and wireless phones or keep the two mailboxes separate.

Customers appreciate the fact that both mailboxes use the same commands to retrieve and delete messages, Roudi said. “Our customers are responding to the feature convenience,” said Roudi. “The voicemail has been a big hit with people. The system can also send a message to their cell phone when they have home voicemail.”

In addition, if a service bundle includes Time Warner's digital voice service and customers make a lot of calls between their wireless and home phones, they could see a net cost savings because those calls are free. Time Warner customers buying wireless data service as part of their Pivot offering pay $15 a month, compared with $25 for customers buying Pivot alone.

Where Time Warner has local television stations, customers signing up for wireless data get an extra benefit: streamed content from those stations to their handset. “Where we have local assets, we're finding that to be a great sell,” Roudi said.

Although Roudi declined to reveal take rates on Time Warner bundles that include wireless, he said, “We've been encouraged by the signs we're seeing and where wireless falls out in the bundling process and how it complements our other services.” He added that the company plans to offer wireless bundles in all of its markets by 2008.

Like Verizon, Time Warner also gives customer a single bill for multiplay services and plans to add more tightly integrated wireline/wireless capabilities in the future. “Right now we're in the deployment phase,” said Roudi. “We're learning how to sell wireless. The value we're trying to get our arms around is how do people think about mobile.”

Spontaneity is a key benefit of mobility, Roudi said. “What's cool is it could offer services to customers on the fly,” he said. “You could access Time Warner services on the road.” He contrasted this with what he calls “portable” offerings, which require premeditation. An example would be a portable video player that requires content be downloaded in advance.

“When we think about Pivot and mobility, that's how we think about product extensions — how to allow customers in real time to get access to services,” said Roudi. “That's the essence of why we're looking at wireless: to enable customers to add mobility to all of our products and features. When you extend that to what we will do next, you're talking about things like accessing a [digital video recorder] remotely to program it and then to access content.” He noted, however, that digital rights management issues will complicate making Time Warner video content available wirelessly.

Beyond simply generating additional RGUs, multiplay bundles offer service providers another important benefit as well: They reduce churn substantially.

“When you look at the numbers, it makes it obvious why such a battle is being waged,” noted Matt Davis, director of consumer multiplay services for IDC. Multiplay customers, he said, “just don't churn.”

Among customers who take a single service from a provider, the churn rate is about 3% per month, Davis said. “With a double play, you cut that to 2% or so, and with a triple play, you're down to 1% or so. Every service you add, you cut the churn rate by about a percent a month.”

Although only 1.5% of U.S. households currently take quad-play services and 10% take bundles that include wireless, IDC predicts those percentages to increase to 10% and 19.3%, respectively, by 2011.

Davis expects the telcos to have greater success than the cable companies at selling service bundles that include wireless. Having wireline and wireless under the same umbrella will give telcos an edge, he predicted. “They naturally will move more quickly in the area of trying to integrate those services,” he said.

In contrast, “the Sprint relationship could be difficult for the cable operators to manage,” Davis said. “There are a lot of things they will have to get right to make it impactful.”

Because they have a strong advantage on the video side, Davis expects cable companies to take a “fast follower” approach toward wireless, becoming aggressive about the service only when they feel threatened by telcos in that area.

Cable companies have had little to fear so far. In view of the potential upside, perhaps the most surprising thing is that telcos have not been more aggressive in pursuing service bundles with a wireless component. Noting that telco wireless businesses have had strong growth without service bundling, Davis believes bundling simply hasn't been a priority for them.

“In 2008 or 2009, if you see AT&T or Verizon turn up the heat, you may see a more aggressive response from the cable companies with Pivot,” Davis said.

PERCENTAGE OF BUNDLED U.S. HOUSEHOLDS

	2006	2007	2008	2009	2010	2011
Quad play	1.5	2.5	3.9	5.9	8.4	10
Triple play	18.9	20.8	29	33.6	35.6	37.2
Misc. bundles with wireless	10	12.1	13.8	15.7	17.1	19.3
Source: IDC