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By Christopher Boring, Toshiba America Information Systems

Using retailers to sell cable modems is an effective approach that saves capital costs, reduces truck rolls and encourages customer retention.

One of the major challenges facing cable multiple system operators (MSOs) is how to use an increasingly growing retail channel. Today, major retailers such as CompUSA, Circuit City and others are moving a significant number of cable modems into consumer homes. After three years of operators leasing cable modems to customers, consumers are finally beginning to realize the benefits of purchasing their own equipment.

How may this trend be used to provide a new channel for other services and equipment? Is the time right for such a move? What are the benefits and pitfalls an MSO may face in the retail arena? And, what are the new costs of doing business in this ever-changing market? These questions face marketing, purchasing and operations leaders in the industry.

The 2000 holiday season was a breakthrough retail season for us at Toshiba. Cable modems flew off the shelf. With the sub-$200 retail price point finally in place, and most MSOs providing a $10 to $15 monthly discount for customer-purchased modems, the value equation finally was right for many consumers. We've seen the retail channel go from zero to more than 10 percent of our total business in a few short months. These were not limited to early adopters, but instead included many mainstream users of broadband cable service. The beauty of this trend for cable systems was that none of these consumers bought a modem without also purchasing broadband cable service.

Retail benefits

The benefits of driving retail sales for system operators are many. First, the capital crunch being felt by many MSOs may be alleviated through use of the retail channel. Most of the major MSOs are feeling that crunch today, and may be forced to limit the number of new subscribers they install if they are unable to make the capital purchases of modems to meet demand. By offloading the purchase burden to the consumer, capital is freed up for more modem purchases or for other capital-intensive projects. As set-top boxes and other technology continue to be introduced, the retail channel will become more important. Where MSOs today face budgeting for a $120 to $150 cable modem, set-top boxes are in the $300 price range, and voice-over-Internet protocol (VoIP) modems may be similarly priced. Offloading expenses to consumers whenever possible may be the difference between expansion and failure to meet demand.

Secondly, MSOs may use the self-installation tools being provided by vendors to substantially reduce truck rolls. These tools let the consumer install the modem, configure their network settings, and test their internal connection themselves. With the cost of a truck roll as high as $100 to $175 per instance, these savings are significant. Auto- or self-provisioning tools are slowly being introduced that will allow the consumer to follow the analog modem Internet service provider (ISP) model for customer sign-up, where no physical contact is made between the consumer and the cable provider or ISP. With multiple ISPs close on the horizon, provisioning tools become even more crucial to successful and economically sound deployment of new services. Fewer truck rolls and higher installation capacity are the critical success factors necessary to achieve "OCF Heaven" for MSOs.

The third benefit of retail also relates to truck rolls. Warranty service and trouble calls also may be reduced if the manufacturer carries the burden of servicing defective equipment. Rather than roll a truck to swap out a modem or set-top box, manufacturers would be responsible for getting the customer equipment replaced and back online as soon as possible. In this situation, it is imperative that vendors are responsive to customer needs and replace their equipment as quickly as possible. Customers paying $30 to $40 per month for service will not be happy if left without the equipment necessary to make the service work. At Toshiba, for example, we have implemented a proactive customer service program, offering advanced replacement modems to consumers. Toshiba has a policy in place to ship overnight a new modem to replace a defective one.

The fourth benefit of retail product deployment deals with customer retention. In an increasingly competitive market, where voice, video and data services are available from multiple sources, customer equipment purchase is another tool to discourage the switching mentality found in the long-distance telephone service market. A customer who invests $199 in a cable modem and pays less per month for his or her service is less likely to pick up the phone and answer one of the many digital subscriber line (DSL) ads constantly heard on radio and TV. The same holds true with set-top boxes and satellite services. With all of the expensive marketing campaigns we all are forced to implement to gain new customers in this very competitive marketplace, retail sales are a natural way to build retention.

Foot traffic

The final, and most enticing, reason that retail holds so much promise as a new distribution channel for MSOs is the ability to offer the services that go along with the equipment. Floor space on retail floors is difficult and expensive to negotiate in most cases. By leveraging technology that retailers already are carrying, MSOs may get a foothold within these stores to demonstrate services, such as cable broadband service. Now the door is open to offer video, voice and data services through these retailers, and to take advantage of the natural foot traffic that exists there in order to sell more core services.

With all of these benefits in mind, it is important to realize that retail is a reality for the cable industry today in the areas where cable modem purchases are encouraged by the local cable system. These are not pipe dreams or expectations, but a reality that we see at Toshiba each and every month when we shake out our piggy bank and see what we've saved. The MSOs that have aggressively pursued retail partners also are seeing the returns.

Informing the retail staff

Retail offers many benefits, but what about the challenges? First, the issue of training and control is important. Most retail stores are revolving doors for employees, so keeping the retail staff informed is an ongoing challenge. For cable operators who are used to controlling what their customers are told, trusting that a third party will deliver the correct message to a potential customer is difficult at best.

When point-of-purchase displays are used in retail outlets, the displays must be monitored and maintained. In most cases, a live demo won't stay live for long without regular monitoring. This situation requires an investment in retail support on the personnel side. As retail becomes more and more important, dedicated staff positions on the MSO side must be created.

Another challenge is a simple one: MSOs are not accustomed to managing the retail channel.

How does an MSO go about getting a retail footprint? It all depends on the retailer. Most large retailers look for a corporate-to-corporate agreement before allowing any presence inside their stores. These agreements may consist of a monthly cost to the retailer, a commission on sales of cable products and services, or both. The biggest bang for your buck will be with the large retailers, but the smaller "mom-and-pop" stores will offer more support and a more controlled environment than a mega-retailer will. The mom-and-pop store also will be more likely to appreciate that you may bring them business by driving people to their store.

Large and small retailers alike will love the idea of special events at their store, where you drive traffic through advertising. Nothing replaces the effect of a live demonstration of cable modem service to a customer who never has seen it before. If you drive an additional 500 customers to a retailer in a day, they will see the benefits of the relationship.

Regardless of the size of a retailer, take advantage of the relationship your vendor partners already may have with a retailer. At Toshiba, we have the advantage of existing relationships with both the consumer electronics retailers and computer retailers. These relationships have allowed Toshiba and its MSO partners to have success with a variety of retailers.

Overall, the expansion into retail is a positive move. The opportunity to address evolving industry issues such as capital constraints, installation capacity and deployment costs exists through management of the retail channel.

While challenges exist, the cable industry has shown the ability to adjust to new paradigms in the past. Through diligent and aggressive channel management, the future of retail looks bright. Retail is real, and it's up to all of us to keep growing this channel.

Christopher Boring is marketing communications manager for the network products division of Toshiba America Information Systems. He may be reached at .

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