Cable television and telephone companies are spending heavily to create the wired world's vision of nirvana: integrated voice, internet and video to the home. But so far, customers are resisting "bundled" services in their droves. Eighty per cent of US households say they are not interested in buying a phone service from the cable company, while an equal number do not want to watch TV over the phone lines. Those few customers who are signing up are motivated mainly by price discounts—hardly a source of sustainable profits.

So why are cable and telecommunications companies, which face slow growth or even outright declines in their core businesses, spending billions on technology and marketing in a costly "battle of the bundles" arms race? They view bundling as a way to strengthen customer relationships, driving higher revenues and lower turnover. But the current broad-brush approach to bundling is more likely to destroy value than to create it.

Without the right combination of convenience, cost and clear benefit to the customer, companies will find it hard to succeed. Back in the 1990s, many respected forces in the software industry—IBM, Lotus, Novell and Microsoft—sought to bundle desktop applications. Despite their attempts, none succeeded until Microsoft delivered separate competitive offerings in each software application, then added features that made the integrated suite of programmes work better together, dramatically lowering their overall cost.

Despite the pitfalls, standing still is not an option. Delay risks further shrinkage in an already restless customer base when a viable and cost-effective set of bundled services inevitably comes along. When Bain & Company analysed customers' current willingness to recommend their cable or phone companies to friends, the proportion of enthusiastic promoters in both industries were among the lowest for any sector. That's a wake-up call if ever there was one.

But the wrong strategy could be costly, in terms of lost revenue and potential to lose customers to competitors with a better bundle. Instead of spending big to reach the few subscribers who say they want bundled services now, companies need a clearer, more realistic picture of their complete customer base. Armed with that detailed understanding, some cable and telecommunications companies have started to develop a targeted approach to strengthening customer relationships in each segment, keeping in mind a few key principles.

First, to retain customers, companies can invest more in upgrading the customer experience around their core offerings. Installation and repair services at both phone and cable companies have long been the fodder of popular comedians. This smouldering customer dissatisfaction can quickly translate into high defection rates when viable alternatives come along.

Where incumbents do currently offer the "gold standard"—such as wireline voice service from the phone company—they can market it aggressively as a way to blunt attacks on their customer base from competitors. They should be touting crystal-clear quality and nearly fail-safe "five-nines" (or 99.999 per cent) reliability.

Second, bundles provide an opportunity to add new features to attract and retain customers. The first wave of integrated services has consisted of relatively minor bells and whistles, things such as having caller ID flash on your television screen. Certainly nice, but unlikely to generate a big surge in bundle uptake. Future waves are likely to include services that will generate revenue streams to be shared among providers. Got to have Eva Longoria's sandals? Click here to get a set. Like the music on the last commercial? Click here to download. Aggregate information about your past purchases and viewing patterns will determine which ads you will see in the future.

But while we are waiting for technology to catch up to marketers' dreams, today's bundled offerings largely compete on price. So it is critical for cable and phone companies to develop a detailed understanding of customer and competitor economics.

How much of a discount can you afford to offer once you'have figured in the benefits of reducing customer churn and increasing usage or driving sales of more profitable services? For phone companies, there is an additional wrinkle in the pricing game. Their infrastructure upgrades and regulatory clearances will not be complete for some time, meaning their bundle lags that of cable companies in a significant number of markets in the US. The trick is figuring out whether offering discounts, which look unprofitable today, are actually a good investment as a retention strategy compared with the cost of trying to reacquire customers who defected to cable bundles.

Of course, describing these economic trade-offs is easier said than done. Many cable operators initially passed on offering voice-over-cable in the 1990s, reasoning that the economics were not attractive. Cox Communications, however, pursued it aggressively and found its reduction in customer turnover more than offset the investment required to offer the service. The company gained significant share in what was one of the first true "triple play" offerings in North America. Despite all the hype, bundling has a long way to go to win a big following. What would motivate customers to give it a try? Given the dearth of integrated services, cost is the driving force today. But the key to long-term success is solid customer relationships based on excellent service and value. Companies need to design service targeted to discreet sets of customers and rewire their organisations to deliver those services profitability.

Moreover, cable and phone providers should keep customers firmly in mind as they consider the third contestant in the battle of the bundles: the internet sector. Those such as Yahoo, MSN and Google all benefit from strong customer promotion scores, lower customer acquisition and network costs, and excellent track records in extending their customer relationships. These players may have low penetration in the voice market today, but their customer base is growing rapidly, and they are aggressively experimenting with value-added services. Indeed, the players that bring today's loyal customers into tomorrow's digital world are almost sure to make, well, a bundle.

Chris Brahm is a partner with Bain & Company in San Francisco and a senior member of Bain's Telecommunications, Media and Technology practice. Paul Smith is a Bain partner in Boston and leader of the North American Telecommunications practice.