Building Better Bundles

Companies find a way to build better service packages

Service bundling has gotten a bad rap as a competitive strategy.

AT&T backed off its major initiatives to integrate voice, data and video services into a single package, even though its AT&T Broadband unit continues to offer all three services in many areas. Sprints Integrated On-Demand Network, the industrys most ambitious next-generation bundling of services, continues to limp into the market amidst constant rumors that it will be shut down due to lack of possible profits.

But some competitors are finding a service package is just what the customer ordered.

XO Communications launched its XOptions package a year ago, just as others were folding their bundle tents, and now sells more than 40 percent of its local lines as part of a service package. Revenue growth in XOptions is running at about 35 percent per month; for the second quarter of 2001, it was 138 percent over the same quarter last year.

In some markets, the numbers are even more impressive, according to XO spokesman Scott Pace. "In the Northern California market, for example, XOptions accounts for 90 percent of our total sales," he says.

XO created three different types of voice and data service packages: one based on DSL; one based on dedicated links, such as T1 (1.5-megabit-per-second) type service; and one based on the number of users involved. All are aimed at small and midsize businesses and allow customers to pick from a menu of services that includes local and long-distance voice, Internet access at varying speeds and Web hosting.

Most recently, XO added a new flavor of hosting, based on Microsofts SQL Server 2000 software and Windows 2000 operating system, that is intended to address a more upmarket customer, says Gene Alstin, XOs director of hosting services. "With the great field sales force that the company has — about 1,000 people in the field selling to the Fortune 500 market — the type of customer set we are addressing is a lot more upmarket," Alstin says. "Our product set has evolved to address those needs. [SQL] Server is a step in a couple of launches we announced earlier in the year. Its really embracing the Microsoft .Net initiative."

With the new SQL Server offering, XO can address the complex Web site needs of companies that are doing business on the Web or performing other tasks such as data mining or customer relationship management.

The original intent behind building service bundles was to attract businesses looking for simplicity, value and strong relationships with their service providers, said Nancy Gofus, XOs vice president of marketing, when announcing the services. XO also promises savings of 25 percent to 35 percent over what it would cost a small or midsize business to buy each service separately from an incumbent provider.

That intent is a driving force for Knology, as well. Knology, a network overbuilder in the Southeastern U.S., has seen remarkable growth offering voice, data and digital video services. The company offers discounts of 5 percent to 10 percent for each new service a customer adds.

Knology is using Hybrid Fiber-Coax and fiber-to-the-curb networks to offer voice, data and video services in bundles that are priced to give maximum discounts to customers that take all three services. The company, which was founded by ITC Holding, now operates in 11 Alabama cities, including Huntsville and Montgomery; eight Georgia cities, including Augusta; three cities in Florida, including Panama Beach; five communities in South Carolina, all in and around Charleston; and Knoxville, Tenn., its current market build-out. Its networks currently pass slightly less than 400,000 potential customers.

Knology has applied for or acquired additional franchises in Tennessee and Kentucky. The company addresses both businesses and residential customers.

Knology reported record growth in August, with revenue of more than $25 million — up 8 percent over the previous quarter.

In addition to the focus on service bundling, Knology shares another strategic initiative with XO: Both companies have built their own infrastructures — though XO leases its backbone services from Level 3 Communications — and strive to get customers "on-net," or completely served off the companys network. The on-net approach lets a service provider control the economics of providing service and provision new service offerings more quickly, with the ability to also control the quality of service offered.

The two service bundlers can claim one additional advantage over incumbents: Because they are working with primarily new network infrastructures, there are no back-office systems that must be integrated in order to deliver a single, bundled bill.

XO did acquire some legacy infrastructure when it bought ISP Concentric Network, but Pace says it has been able to integrate those systems into the network being built out today.