Hardware Vendors Gear Up for Retail

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MSOs aren't the only ones that need to make adjustments as the cable industry moves to retail.

Incumbent hardware providers-most notably Motorola Inc. and Scientific-Atlanta Inc.-are already working toward delivering retail-friendly products.

They'll face fierce competition from a number of consumer-electronics companies that have already developed ties with retail through sales of televisions, direct-broadcast satellite systems and PC peripherals.

Philips Consumer Electronics Co. already makes a digital-cable set-top box for use by MediaOne Group Inc. subscribers in Jacksonville, Fla.

"We are very excited about the potential later on of retail cable-box distribution," Philips Home Access Solutions senior vice president of marketing and sales Bo Ferm said. "Philips has a great advantage because of its brand."

Hardware executives differed regarding the degree of importance a brand name plays at retail.

"The retailer will tell you they have the brand to pull anything through," S-A vice president of marketing and business development Ken Klaer said, adding, "I think we would have to do something to improve the overall awareness of our brand as the commercial business develops."

In moving away from the General Instrument Corp. brand that became Motorola Broadband Communications Sector, Motorola already has. "From our standpoint, it was very advantageous for us to go out with the Motorola brand," Motorola Broadband director of market development Dwight Sakuma said.

Thomson Consumer Electronics' RCA Broadband Group general manager Carl Bruhn agreed. "Clearly, the acquisition of GI by Motorola gives them significantly better brand recognition," he said. "S-A will be looking for something that would give them something similar."

Aside from the draw that a high-profile brand brings, competition from new players will ultimately release the stronghold that S-A and the former GI have had on the cable market. That can only help operators and consumers, Bruhn believes.

"Even in the analog decoder-box world monopolized by GI and S-A, you haven't seen the prices go down as they have in the competitive consumer-electronics world," Bruhn said. On the other hand, competition in DOCSIS-compatible [Data Over Cable Service Interface Specification] modems has already led to significant price drops, he added.

Operators agreed that brands will play a critical role as cable moves further into retail.

But it's not necessarily the top priority today in moving cable modems onto the sales floor.

"In some emerging technologies, the product working is more important than the brand itself," AT & T Broadband senior vice president of marketing Doug Seserman said. DOCSIS certification lends the credibility needed to sell the product.

"Having multiple hardware suppliers will help further innovation and lower costs," Seserman added.

On the cable-modem and digital set-top-box fronts, the incumbent suppliers are learning things retailers need that they might not have had to provide in distributing directly to the cable operator.

"Here at Motorola, we are putting plans in place for retail-distribution programs, including merchandising programs that support retail, plus operational programs," Sakuma said.

WARRANTIES, OTHER ISSUES DIFFER

Product warranties and product fulfillment differ in serving retail, rather than business to business, Sakuma added.

"We have to make sure we have the UPC [universal product] codes on the boxes, and we have to look at the design of the box itself," Sakuma said. "We have designed a shippable box with Motorola branding, the model number and featured items on what the hardware platform can support, such as the electronic program guide and impulse pay-per-view."

Listing specific features on the product packaging can get a little tricky because feature availability will vary from system to system, even within a geographic area served by a single retail location.

Retailers, too, will have to be somewhat noncommittal about available features, especially if they are advertising digital-cable boxes on a regional or national basis.

"One of my functions is to bridge the gap between the MSO and the retailer on a market-by-market basis," Samsung Telecommunications America Inc. director of Internet-service-provider and retail sales Rene Buhay said.

Samsung, which plans to distribute its cable modems through retail later this year, will work closely with MSOs on product-sales forecasts, Buhay said.

RCA plans to leverage its recent entry into broadband cable modems at retail by cross-promoting its other broadband products, such as its "Lyra" MP3 portable music players.

"The kids who want high-speed connections to the Internet are also into music," Bruhn said.

While consumer-electronics companies might have longer histories with retailers, cable set-top incumbents hope their ties to cable will help to make them valued players in the move to retail, as well.

"Retailers have to ask operators how they operate so the customer-service aspects can be handled properly," Sakuma said. He added that cable set-top owners would need to know whom to call if there's a problem following installation-the retailer, the operator or the set-top manufacturer.

WILL BOXES GO RETAIL?

Of course, that scenario is only necessary if digital set-top boxes actually find their way to retailers' cash registers. Not everyone believes that's a given.

"Cable is a very efficient distribution channel," Klaer said. "With retail, you introduce retailer costs, plus the cost of the PODs [point-of- deployment modules]. With retail, unless there's subsidization, it will be a more expensive product."

Many within the industry believe that even if set-top boxes move to retail, many operators will continue to offer lease options, as well. "If the consumer can buy a box for $400 or rent one for $5 or $6 per month, why would they buy it?" Klaer asked.

One distribution model that makes sense to Klaer is for cable operators to compensate retailers for signing up new customers, but not necessarily to distribute their hardware at retail.

But if operators want to take advantage of the additional exposure retail brings them, they may have to find ways to make it profitable for the retailers to sell the hardware, some said.

"Operators can support retail by not undercutting the cost at retail" with better promotional offers directly from their cable systems, Buhay said. For example, offering cheaper installation to consumers who buy from an operator's customer-service representative could be seen as a disincentive to retailers.

"We're working out the coexistence of both a lease and a purchase model," RCA Broadband marketing manager Tony Watters said. "It's not easy. The retailer is going to expect to be paid something for that service."

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