Cable Modems Off to Slow Retail Start

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Cable modems will continue their retail push in 1999, but
the move from consumer leasing to purchasing will be slowed by the lack of industry
standards.

Executives at the MSO, retail and manufacturer levels see
1999 as a year of transition, rather than as one of widespread retail deployment.

Cable-modem vendors and MSOs had planned to have DOCSIS
(Data Over Cable Service Interface Specification) standards finalized by last month's
Western Show, with hopes of selling the first interoperable modems by the end-of-year 1998
holidays.

But modem manufacturers face increasing demands from MSOs
and Cable Television Laboratories Inc. for more vigorous testing, according to Steve
Rasmussen, marketing director of Toshiba America Consumer Products.

"Without certification, there will be a reluctance
among cable operators to recommend the purchase of modems," Rasmussen added.

Wayne Surdam, director of marketing for the Cisco Networks
program at Cisco Systems Inc., agreed, saying that without standards, consumers could take
modems home from retailers and find that they don't work on proprietary infrastructure.

Once the standards are in place, MSOs will need to upgrade
their headends so that they're compatible with the DOCSIS modems. And they'll need to
continue to build out their two-way cable plant.

Cable modems will not roll out nationally, but on a
city-by-city basis, as cable operators upgrade their plant.

"It will be geographically specific -- even
neighborhood by neighborhood -- because there will be different cable companies
involved and different content companies, such as Road Runner and @Home [Network], from
one store to the next," said Rick Borinstein, senior vice president of merchandising
for RadioShack.

Borinstein said RadioShack is "definitely very
interested in bringing home connectivity in all of its forms to our customers." In
addition to cable modems, RadioShack plans to add digital-subscriber-line service, as well
as broadband access by satellite and even by power lines someday.

Sears Roebuck & Co. is looking at stocking cable
modems, but it hasn't made any commitments, said Chuck Cebuhar, its vice president and
general manager.

"We need to see consumer demand at retail,"
Cebuhar said, adding that it would be easier to gauge if the product were sold uniformly
market to market.

"Retailers have a limited amount of capital, and they
want to purchase products that are going to flow quickly through their distribution
channels," Rasmussen said.

Another factor holding up a quick retail rollout is the
negotiating process between retailers and MSOs. Retailers want a cut of the monthly
modem-service revenues, and cable operators want to hold onto as much as they can.

"Cable operators want retailers to just sell black
boxes," Borinstein said. "I can tell you that as a retailer, that's not
interesting to me."

Instead, RadioShack wants to share in the lifetime revenue
of the subscriber, "for the good of the Tandy [Corp.] shareholders," and because
cable-modem customers are likely to return to RadioShack if they have problems with their
service.

Some suggested, too, that operators might have to subsidize
part of the cable-modem hardware itself in the same way that retailers are compensated for
direct-broadcast satellite and cellular-phone products.

The challenge with splitting cable-modem-service revenues
is that they're fairly limited compared with other monthly subscriptions, and there are
more players looking for a cut, including the Internet-service provider.

But retailers do offer cable operators something in return
for a share in the revenues -- increased product visibility, consumer education, joint
marketing efforts and even help with service, support and installation.

There's also a move among equipment manufacturers to
promote self-installation so cable operators can save on the costs of truck rolls, which
eat into their profits.

As cable modems make their way to retail, a number of
brand-name consumer-electronics vendors are looking to enter the market. Manufacturers
such as Thomson Consumer Electronics, Samsung Telecommunications America Inc., Toshiba and
Zenith Network Systems believe that their strong brand names and existing relationships
with retailers can help to ease the move for cable operators as they go to retail.

Borinstein said the brand name on the cable modem is less
important than the service itself.

But others said having three strong brand names -- from
the cable operator, the ISP and the modem manufacturer -- can help to make consumers
comfortable enough to take the plunge.

Pricing will also help to drive cable-modem sales,
especially as the market moves past the early adopter stage. Several executives said that
once prices break below the $300 barrier, the industry will see increased sales.

Even though standards have not been adopted, and the
service is not yet widely available, a few retailers and cable operators across the
country have started limited retail tests. In Boston, MediaOne has worked with a number of
Circuit City Stores Inc. locations.

Dan Hillen, director of sales-channel development at
MediaOne, said he's learned that there is a demand for the service, and that some
consumers are willing to buy cable modems.

"We have a lot more to learn," Hillen said,
adding that the MSO plans to expand its tests to other markets this year.

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