TCIS SPOKANE STRATEGY Modem Rollout Leaves No Lease Option

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Tele-Communications Inc. last week became the first MSO torequire customers using standardized cable modems to buy them at retail.

The MSO said it will launch high-speed-data services inSpokane, Wash., by mid-November.

"What we're doing represents a significantparadigm shift to the retail model in cable," said Susan Marshall, vice president ofTCI.NET, the company's Internet-service provider.

While cable modems have been sold through retail outlets invarious MSOs' operating territories over the past year, operators have also offered aleasing option that's included in the monthly fee.

The test comes as retailers are balking at selling modemsthat customers can also lease from operators.

In moving to a retail-only mode of distribution, TCI iscounting on retailers being able to sell modems that the industry certifies as compliantwith the standard known as DOCSIS (Data Over Cable Service/InteroperabilitySpecification). This will mark the first time that stores will sell DOCSIS modems.

But Cable Television Laboratories Inc. has not yetcertified any modems as DOCSIS-compliant, and it's uncertain when it will do so.

Initially, TCI will only sell modems from 3Com Corp. inSpokane. TCI is using 3Com's headend CMTS (cable-modem-termination system), whichensures that 3Com's DOCSIS modems will work as CableLabs completes interoperabilitycertification of other DOCSIS-modem suppliers, said Levent Gun, vice president and generalmanager for the cable-access group at 3Com.

"Everyone's CMTS has to be tested againsteveryone else's, and that hasn't been completed yet," Gun said, inexplaining the DOCSIS delays. "What tends to happen at this stage is that people findpoints of incompatibility in software, they make adjustments, and then they find newissues."

As a result, 3Com will ship modems to Spokane, as it haselsewhere, that can later be software-upgraded to be DOCSIS-compliant, Gun said.

CompUSA, the only Spokane retailer committed to stockingthe modems, will decide which other brands to stock as other vendors come into compliance,said Jim Johnson, director of business development and product management at TCI.

Spokane will act as a testing ground for TCI'sretail-sales strategy elsewhere, he added.

"This is our first market where we're deployingDOCSIS," Johnson said. "We'll go in and evaluate the market performancebefore we make any decisions to move to 100 percent retail [distribution] in otherareas."

The big question that TCI and the rest of the industryfaces is whether requiring consumers to buy modems at retail, with 3Com's unitspriced at $319.99, will benefit or hurt penetration.

While the upfront cost might turn some customers away, TCIbelieves that a strong marketing push, combined with the widespread manufacturing supportthat comes with retail distribution, could more than offset the downside, Johnson said.

Eliminating the lease option may be the only choice thatthe industry has if it wants to exploit the benefits of retail distribution ofstandards-compliant cable modems.

Various industry sources disagreed over the question ofwhat retailers are demanding in exchange for commitments to selling modems. However, 3Comand TCI officials made it clear that CompUSA and other stores that they were talking towould be unwilling to stock the modems if consumers had the option to lease them fromcable operators.

"Retail support is definitely there for cable modems,because even though they know that they can't sell thousands of units at this stage,they also know that cable modems will draw a lot of traffic," Gun said. "Butwe're hearing from a lot of retailers that they don't want to put modems ontheir shelves if the MSO is leasing them."

Marshall confirmed that this was the case with CompUSA inSpokane.

@Home Network -- the service-provider affiliate of TCI.NETin Spokane and the other 10 markets where TCI has launched high-speed-data services -- isworking nationally to expand retail relations beyond the deal that it currently has withCompUSA, said Paul Salzinger, director of business development for @Home. The high-speedservice has deals with 13 stores, with two more to be added soon.

Outside of Spokane, these relationships have to do withmarketing the service and drawing traffic, and they don't involve retail sale ofmodems at this point.

"We're in negotiations with six other nationalchains, including companies in consumer electronics and office products, as well ascomputer stores," Salzinger said.

Along with getting a share of the revenue from the $40"@Home in a Box" start-up kit -- which nets customers a $50 discount oninstallation and other start-up costs -- the retailer benefits from the marketing clout ofdirect-mail and cable-TV ads that promote high-speed-data services and the affiliatedstores, he added.

Local MSO participation in coordination with the national@Home effort is crucial to a successful store tie-in and, ultimately, to retaildistribution of modems, said Richard Rasmus, vice president of Comcast Corp.'sComcast Online Communications unit.

Comcast has data-service-marketing relationships withCompUSA stores in its Philadelphia, New Jersey and Baltimore markets. The MSO has rolledout high-speed-data services using pre-certified DOCSIS gear from Cisco Systems Inc. inthe Richmond, Va.; Charleston, S.C.; and Atlanta markets, but retailers are not sellingmodem gear yet.

"We believe that @Home is the right company to beworking with for our interests [in retail-store negotiations] at the national level,"Rasmus said. "But we're also finding that it's especially important todevelop strong local ties, because we're in the best position to make this a win-winproposition for the retailer and ourselves."

Customers at participating CompUSA stores can sample thecable-data service, pick up a phone with a direct link to a customer-servicerepresentative to find out if the service is available in the customer's locality,and order the service.

While cable companies have to be careful to limit storelinks to areas where a large portion of the local population has access to the service,these early demonstrations of successful marketing cooperation are vital to getting themessage through to national-chain headquarters that affiliation with cable is a good idea,Rasmus said.

But it's clear that cable has a tough sell ahead tobring more retailers into the fold. RadioShack, for example, is among the chains that lookat cable modems as an exciting marketing and sales opportunity, but that are not rushingin, said Rick Borinstein, senior vice president of merchandising at RadioShack.

"We want to participate in the downstream revenues:We're not interested in just the hardware-sales piece," Borinstein said.

RadioShack believes that share-of-revenue deals are a fairexchange for its 7,000-store reach and its willingness to train sales personnel to workwith customers in helping them to choose services -- whether in direct-broadcastsatellite, cellular telephony or high-speed data -- Borinstein added.

RadioShack has already signed on with Sprint Corp. as apartner in the distribution of consumer terminals for that carrier's forthcomingbroadband services, so the retailer is in a position to drive sales in the direction ofDSL (digital-subscriber-line) telco modems, he added.

"Retail distribution is a very necessary ingredient,but it's not a panacea," said Dick Day, vice president and general manager ofthe marketing division within Motorola Inc.'s Multimedia Group. "It's goingto start small and grow over the next couple of years."

MSOs have to be careful that in the transition to retail,their customers continue to register the same high levels of satisfaction with the servicethat they do now, when the MSO is directly responsible for handling technical problems,Day said.

And, he added, stocking cable modems might not be aparticularly appealing proposition from a retailer perspective if there are several cablecompanies in the market, each with different high-speed distribution footprints andstrategies.

Still, Day said, Motorola is preparing to announce retailaffiliations of its own in conjunction with the introduction of its DOCSIS modems, whichare now slated to arrive in the market by late in the first quarter of 1999.

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