Retail Modem-Sales Model Poses Many New Challenges

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The long road to retailers' shelves may be a bit
smoother for cable modems with the emergence of the Data Over Cable Service Interface
Specification certification.

But until their footprints are large enough for retailers
to consider them grownups, cable modems are likely to continue their painful adolescence.

Retailers remain cautiously optimistic about the future of
cable modems in their stores, and most agreed that the modem business has an impressive
upside once customer availability of Internet access over cable reaches a critical mass.

But major issues such as market consolidation, diverging
technologies and the relatively slim profit margins on modems are stunting their growth as
a mainstream item in national retail chains such as Best Buy, Circuit City Stores Inc.,
CompUSA Management Co., Staples Inc. and others, according to modem manufacturers.

"Retailers are looking at cable modems as the first
proposition, and they're looking for the right business models," Terayon
Communication Systems CEO Zaki Rakib said. "Stores are looking for the right shelves
to put them on."

Customers also are looking for modems, but few are finding
them. The reason why, most industry experts concluded, is because cable-modem services are
not yet ubiquitous.

"Modems are an entry point to consumers entering into
technical products and services," Rakib said. "One-half of the retailers
don't even know what cable modems are yet."

Larger retailers such as CompUSA have been quick studies of
the potential of cable modems, and they are tracking their growing footprint, albeit with
some trepidation.

"[The cable-modem business] is a great potential
growth area, and lots of people are looking forward to faster modems and Internet
technology. But the divergence in technologies is still a problem," a CompUSA
spokesman said.

Interfacing with myriad technologies from a host of
different manufacturers continues to plague the cable modem-to-retail business, making the
widespread rollout of modems tricky for MSOs and retailers.

And although DOCSIS certifications are helping -- with five
major brands winning interoperability status so far -- the availability of service and
economies of scale are what retailers want to see before taking the modem leap.

"They're not planning [cable-modem retail sales]
as a goodwill gesture. They want a business out of it," said Dick Day, corporate vice
president and general manager of multimedia markets for Motorola Inc.

And the business will come, Day insisted, but not anytime
soon. "This is just the opening bell of broadband services into the home. Retailers
see that the explosion of streaming video, still video, voice-over-IP [Internet protocol]
telephony and other technologies will open up whole new services and products for their
stores. And they're not going to miss them, including cable modems."

"It's not a great picture for retailers,"
Day continued. "They recognize that this is a city-by-city rollout. By year's
end, probably 20 cities might have service. Retailers don't want to administer that
many different programs."

Nor do they want to accept skimpier margins on modem sales
than they're used to on other consumer-electronics products -- a major bone of
contention between retailers and modem makers.

"With the price of a cable modem at about $300,
there's not a lot of room for the 15 percent to 35 percent margins retailers are used
to," Day said. "That's a real barrier."

One barrier that is gradually being removed, however, is
the lack of modem interoperability. DOCSIS-certified modems are expected to solve that
problem and to help modem manufacturers in their discussions with retailers.

Certification has made vendors' conversations with
retailers more pleasant, one former marketing executive at a modem maker said.

Best Buy, CompUSA and Circuit City are leading the way with
kiosks and phone messages that tell you if you have modem service available. But the
modems still need to win shelf space and sales support at the stores. Once those bridges
are crossed, the cable-modem business can start getting serious.

With the pragmatic, lukewarm approach by retailers, and
with their pulses not likely to quicken at the prospect of widespread cable-modem
distribution anytime soon, manufacturers such as 3Com Corp. and Terayon are looking for
alternative distribution channels.

"When retail really happens and we can keep the
integrity of modems, we can create about 50 percent of our retail sales through
fulfillment over Web sites and other alternative distribution channels. There are lots of
ways to reach the consumer other than retail stores," Rakib said.

At the end of the day, however, retailers are expected to
bring the big revenue prize to the cable-modem business.

"They have a number of crucial points," Day said.
"For instance, in-store demonstrations are killer tenets in this business and
critical in the sales cycle. The retailer is in a great position to do that."

He added that with retailers having more mature technical,
installation and maintenance support, consumers are comfortable buying gear such as modems
in consumer-electronics stores.

But consumers are getting impatient. A growing number of
people are interested in getting cable-modem service but they either do not live in areas
with activated service, or they live in activated areas but don't know it.

The solution, Day and others said, is a nationwide database
detailing where modem service is available. "Getting a footprint and database around
the product are keys to making it work at retailers. Knowing where the service is
available through a database is critical," he said.

This is so critical, in fact, that companies such as 3Com
are convinced that without a national database, the cable-modem business will flounder for
years to come.

The consumer could lose, as well, Rakib said, by literally
being in the wrong place at the wrong time.

"If I buy a modem, come home, call AT&T [Corp.]
and ask when my area will be upgraded, they won't know. So my modem is not usable.
That will be a nightmare, and it will create lots of disappointment," he said.

Rakib noted that the cellular-phone business has utilized
such an approach, identifying where service or coverage is available and providing
detailed information about the product and services.

Yet identifying where customers live and who is eligible
for product service is foreign to most retailers, and it poses another challenge.

"This is the first product they've ever sold
where they have to know where people live to sell them the product. Our strategy with
retailers is to not oversell modems because there are still several issues," said
Dave Torr, group product manager for data-access systems at Philips Broadband Networks.

Even with a database in place, however, moving cable modems
to retail shelves remains a daunting task for cable operators and modem vendors.

"@Home has a 1 percent to 3 percent penetration rate,
and it is having difficulty with its subscriber projections and install times. What will
happen at 15 percent to 20 percent penetration? It's not clear how they'll
handle those numbers," said Antonette Goroch, a senior analyst for The Carmel Group,
a media-research group in Carmel, Calif.

Goroch also pointed to the cable industry's
infrastructure as an impediment to cable modem-to-retail growth. "Less than 20
percent of cable's plant is ready to handle modems, plus MSOs are busy with digital,
HDTV [high-definition television] and more," she said. "Their plates are
full."

Whether cable operators have the stomachs to press forward
with upgraded plant to accommodate cable-modem service is debatable. What is clear,
however, is that until the cable-modem business grows a much larger footprint, its prints
aren't likely to reach retail shelves in the near future.

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