The Telecom Convergence Puzzle

Deregulation, Technology Drive Packaging of Communications Services

By Carolyn Hirschman

A popular maxim warns against putting all of your eggs in one basket. But more and more consumers are doing just that when buying telecommunications services, and governments are poised to join them in a new trend called "bundling."

Bundling, the purchase of more than one type of service from a single vendor, is catching fire as customers seek the simplicity of one-stop shopping. One bill. One point of contact. Less hassle. Maybe even lower prices.

In telecom bundling, customers buy a package of voice and data services from one company to suit their particular needs. Depending on the location and provider, the service menu can range from local telephone and long-distance service to Internet access, cable television, videoconferencing and more.

As telecom competition grows, the private sector is taking the lead in buying bundled services. Government customers remain largely on the sidelines, though they say they're aware of the trend and its potential. Whether and how the U.S. government's $2 billion-plus in annual telecom-services spending shifts during the next several years remains to be seen.

The Urge To Bundle - Or Not

Two sea changes in the telecom industry - technology convergence and deregulation - are the primary forces behind bundling, according to analysts.

"What's driving bundling is the belief that a full-bundled service provider is the one that will survive in this industry," says Paul Glenchur, an analyst at Schwab Washington Research Group. As voice and data technologies converge, providers can use their facilities more efficiently by selling many services over a single pipeline, he says. Other advantages are additional revenues, economies of scale in sales and marketing and lower customer turnover.

The bundling phenomenon was also prompted by the Telecommunications Act of 1996, which seeks to increase competition among all telecom sectors, especially local phone markets. Before the act, customers had to buy local service from the "incumbent" carrier, usually GTE Corp., or a regional Bell operating company (RBOC) such as Bell Atlantic Corp., and long-distance service from AT&T or one of its peers. The telecom act allowed carriers to invade each other's turfs, making it possible for the first time to package local and long-distance service together.

But bundling is no panacea, experts warn. The concept has failed in other industries - travel, for example - and it's still unproven in telecom. Despite the appeal of cross-selling services, this strategy doesn't make sense for every provider or customer.

"Generally speaking, it's a good idea, but there are plenty [of providers] out there acting on a hunch," says Dwight Allen, a consultant at Deloitte & Touche Consulting Group in Washington. Some companies jump into new service offerings without analyzing customer demand or profitability, he says.

Other pitfalls, according to a recent article by Coopers & Lybrand consultant Andrew Zimmerman, include customers' unwillingness to switch providers because of perceived lower quality, providers' lack of experience in a new niche and the possible need to build or rent costly facilities.

"In short, there's a lot more to bundling ... than a single bill for a basket of service. A bundle based on reduced prices will have some value for customers, but neither discounting alone nor a unified bill is going to be the 'killer app' for the competitive telco of tomorrow," Zimmerman wrote in a Coopers & Lybrand journal.

Government Agencies Demand Merged Voice, Data Networks Jay McCargo As governments move to bundle telecommunications services, a parallel convergence is taking place: the purchase of advanced systems that marry voice, data and video functions over a single network. "The technology is moving rapidly to single networks with single technology. Everything is driven to a bit stream so the ultimate package is bandwidth," says James Payne, assistant vice president in Sprint Corp.'s government systems division. New technologies allow users to carry voice and data traffic of various capacities over one integrated network rather than the traditionally separate ones - analog, circuit-switched networks for voice and digital, packet-switched networks for data. Government and businesses alike are demanding the new systems, which providers say deliver more efficient, less expensive ways to communicate. "Like everyone else, government is looking for lower costs. Networking is very expensive," says Keith Mumford, director of global advanced planning at General DataComm Inc., a Middlebury, Conn.-based company that makes ATM switching systems. (ATM is asynchronous transfer mode, a very high-speed transmission technology.) "The customer demand is already there, and the procurement is rushing to catch up," notes Jay McCargo, Bell Atlantic Corp. director of governmentwide agency contracts. The General Services Administration, the federal government's main contractor for telecom services, has witnessed increasing use of data services and networks, in part because engineering and science applications demand more bandwidth, says Frank Lalley, assistant commissioner for service delivery in GSA's Federal Technology Service. "Our contracts are written flexibly enough so we can adapt to new technologies," he adds. Some federal agencies - the Defense Department, for example - are more attuned to the technology-convergence trend than others, contractors say. A case in point is Miramar Marine Corps Air Station in San Diego. The station, which serves as the command center for all Marine Corps air stations in the western United States, in December bought a video network system through a GSA contract with systems integrator VIVID Resources Inc., also of San Diego. The new system, called EVS-50, allows a variety of functions: desktop videoconferencing between commanding officers and remote personnel, retrieval and transfer of data files from an ATM backbone and monitoring of flight-deck activity using remote cameras. The $8 million system, which Miramar had tested for several months, has already saved time and money, says Seth Hoerth, president of VIVID. Two-way videoconferencing allows station personnel to meet "face to face" without having to be in the same room. It also obviates for some people a 90-minute commute between Miramar and El Toro, a former Navy base in Orange County, Calif., that's being moved to Miramar. In addition, military police can monitor certain station gates by camera. "Before, they had to get in the car and go," Hoerth says. The unique system uses a technology made by Objective Communications Inc., a small, publicly traded company based in Portsmouth, N.H. The beauty of the patented VidPhone system is that it permits three broadband functions - desktop videoconferencing, data retrieval and broadcast television - over existing telephone wires, says Frank Gore, Objective's vice president of sales. In other words, customers can use their own computers and phone lines without having to buy additional TVs and coaxial cable. Objective's equipment is installed in a phone closet. Users need a camera, speakers and special "vidmodem" on their desktops. "We're plug and play," Gore says. Another advantage is that customers can use any type of phone line - analog, digital or ISDN - rather than modifying local area networks. As a result, LANs don't need to be rewired and aren't slowed down by having to carry compressed video traffic, Gore says. It's all made possible by new signal-processing technology. Objective began shipping its product in fourth-quarter 1997 to telecom, corporate and government customers, who use it for applications ranging from security to telemedicine. "Business is very brisk," Gore says without revealing sales figures. Bell Atlantic uses the system under a Defense Department contract, TEMPO, to upgrade more than 100,000 military desktops in the Washington area, according to Objective. Hoerth says Objective's technology holds great promise in a converged world. "I believe education and training will be revolutionized by this. It can be done remotely," he says. Workers and students could be trained at their desktops at a time of their choosing rather than having to meet all at once in a single location. -By Carolyn Hirschman

On a more practical level, telecom bundling simply isn't possible everywhere because local competition so far is limited to large urban areas, including Washington. Elsewhere, customers must buy telecommunications the old-fashioned way, by buying specific services from different companies.

This situation will change in a big way once the Federal Communications Commission allows RBOCs to sell long distance in their territories, giving them the ability to package it with local voice and other services. The telecom act requires RBOCs to satisfy a 14-point "checklist" of requirements showing they've met specific competitive standards, such as number portability and interconnection, in a given state.

No RBOC has passed the test yet, though Ameritech Corp. of Chicago, BellSouth Corp. of Atlanta, and SBC Communications Inc. of San Antonio, have tried. Observers expect the FCC to approve a long-distance proposal, perhaps Bell Atlantic's in New York, later this year.

For the time being, then, the bundling leaders are competitive local exchange carriers (CLECs) and independent telcos such as GTE of Stamford, Conn., and Southern New England Telecommunications of New Haven, Conn.

Some companies are pursuing the residential market - RCN Corp., a Princeton, N.J.-based CLEC, sells various services to homes along the Boston-Washington corridor, for example. But most focus on small- and medium-sized businesses.

But one size doesn't fit all when it comes to bundling, experts say. "There are customers who react favorably to one provider, one bill, but there are those who prefer to shop around," says Allen. The smart providers give customers a choice: bundle or buy a la carte.

In general, households and small businesses want an all-in-one package, although the sticker shock of a large monthly bill could scare off some.

Big businesses, in contrast, are more likely to have the in-house expertise to shop around for the best deal on each component of telecom service.

According to a survey by the Strategis Group, a Washington telecom consulting firm, 67 percent of customers want two or three services bundled; the most popular combinations consist of local and long-distance phone plus cable. But 47 percent of businesses want five or six services from one vendor. Add-ons include Internet access, paging and cellular service. The sales lure is: the more you buy, the more you save.

Governments' Response

Where do federal, state and local governments fit into the bundling trend? They're neither jumping on the bandwagon nor lagging behind it, procurement experts say. In general, there's an awareness of the concept but no blind leap into it. For the most part, governments still contract for telecommunications on a service-specific basis, buying local, long distance, cellular, Internet access and so forth from different vendors.

"We anticipate a lot of competition (from smaller CLECs) in New York." -Jim Glowacki

"It's an issue of economies of scale. They're often able to get better pricing. They can get a firm handle on their costs under one contract vehicle," says Jay McCargo, director of governmentwide agency contracts for Bell Atlantic Federal Systems.

Governments' slowness to bundle isn't entirely their own choice, experts say. Not many companies offer both local and long-distance service at this point, and you can't buy something that doesn't exist.

"Even today, there's not a single [federal] governmentwide contract through which you can get local and long distance. That's because, largely, the industry is not integrated yet," says John Okay, senior vice president of telecommunications and special projects at Federal Sources Inc., a McLean, Va.-based government-contracting consulting firm.

Although voice and data services have been consolidated under various contracts, notably FTS 2000, the broader categories of service - local, long distance, wireless, Internet access - remain divided among different vendors.

"I predict it's going to be another three to five years" before the feds set up a contract for bundled services, Okay says.

"The moment carriers can provide local and long distance together, the government is ready to do that," adds James Payne, assistant vice president in Sprint's government systems division.

At this point, the best bet for bundling lies in two major General Services Administration contracts: the Metropolitan Area Acquisition (MAA) program and FTS 2001. Each seeks to drive down prices by taking advantage of emerging telecom competition. A byproduct is the potential to bundle.

Bundling Potential

The MAA program, a set of first-of-its-kind competitive awards for local service, will choose contractors in major cities to provide circuit-switched voice and data services as well as dedicated transmission to federal agencies.

FTS 2001 is a major contract for domestic and international long-distance voice and data services, dedicated transmission and videoconferencing that will replace FTS 2000, the 10-year contract held by AT&T of Basking Ridge, N.J., and Sprint Corp. of Westwood, Kan., that expires Dec. 31.

After a one-year "forbearance" period, during which contracts can't be changed, contractors can add optional services. An FTS 2001 awardee could add local service; an MAA awardee could add long-distance service, assuming regulatory approval.

"Adding services is at the option of the government. We have to go ahead and amend the contract. The government will take a look at the rates and the terms and conditions," says Pete Fridman, GSA's acquisition manager for the MAA program. Given the current schedule, no "add-ons" are expected until late 1999 at the earliest, he says.

Whether this bundling potential will pan out is uncertain. "There's a high degree of speculation that either one of those [contracts] could be challenged," Okay says.

The MAA and FTS contractors aren't likely to want competitors infringing on their hard-won domains, he says. GSA could take the "high ground" by standing firm that "this is consistent with the spirit and intent of the telecom act, which is to encourage competition," he adds.

The FTS and MAA contracts are expected to be awarded later this year. MAA will start in the New York City area this year, followed by Chicago and San Francisco. Another six or seven cities from among 43 "best candidates" could be announced by the year's end, Fridman says.

One interesting question is: Who will vie for each contract? That could determine not only who gets millions (or billions) of dollars in government business, but the extent of services and bundling that could be offered down the line.

Fridman wouldn't disclose the number of prequalified bidders for the four-year New York MAA contract, worth a minimum of $7 million. Bell Atlantic and Teleport Communications Group of Staten Island, N.Y. - the major and minor GSA vendors in New York - say they plan to submit proposals by the May 27 deadline.

Smaller, feistier CLECs such as Teleport could give the big, established Bells a run for their money. "We anticipate a lot of competition in New York," says Jim Glowacki, Bell Atlantic's development manager for GSA programs. The New York area, with 11 local phone companies, is one of the most competitive telecom markets in the nation.

Bidders on the four-year, $1.5 billion FTS 2001 contract are more predictable. Practically speaking, the RBOCs can't bid because none has FCC approval to sell long distance nationwide. And most CLECs don't have the necessary national or global reach. That leaves a long-distance giant - AT&T, MCI or Sprint - as the most likely winner.

But RBOCs could enter the game later if, for example, Bell Atlantic wins the New York MAA, gets FCC long-distance approval for New York and tacks on that service to its MAA contract. "We're exploring the possibility," Glowacki says.

The State and Local Market

Like the feds, most state and local governments haven't taken full advantage of bundling, but they're open to the possibility.

"From a contract management point of view, it'd be easier. From an administrative point of view, we'd have to look at it," says Armand Malo, Fairfax County, Va., assistant purchasing director. The county would want to ensure lower costs, quality service and competitive bidding first, he says.

But some governments have moved ahead. The state of Ohio, for example, bundles long-distance voice, Internet access and video transmission over one network under a contract with LCI International Inc. of McLean, Va., says spokesman Tyler Gronbach. "They can save more by bundling services than by buying them one at a time," he notes.

Similarly, West Virginia rolled previously separate telecom credit-card management and billing services into its long-distance contract last summer, says Matthew Brown, manager of communications in the Department of Administration's division of information services. "We got very competitive bids," he says. AT&T ultimately won the $25 million, three-year contract.

In general, though, "regulatory reform has not gotten to the point where I can get one company for everything," Brown says. "Probably in 18 to 24 months, I'll be able to do that kind of bid."