It's time to listen to the customer. I mean really listen to what they want and make delivering what they want your top priority. After talking with a lot of Retailers, I believe they put much too high a weight on what their Vendor partner wants them to do. In addition, I think consumer confidence will grow increasingly discerning, forcing Retailers alike to deliver real value. Going forward, if you can deliver meaningful value you will be paid what you deserve and more. Furthermore, if you can truly listen to the customer you will provide even more value back to the Vendor.

I bring this up because I believe that partnerships in this industry have fallen far from the target for quite some time. I would submit that there are many, perhaps dozens, of reasons for why Vendor-reseller partnerships fail. A lot of it has to do with different goals and objectives. I'm not talking about general goals.

1. Win over more customers.
2. Increase sales and margin.
3. Grow our share over Competitor X.

I'm talking about hard, measurable targets that go beyond the sales and margin that each partner splits after a transaction is complete. These are obviously examples of partnership objectives but they should give you a flavor of what I'm referring to. Essentially, the difference between soft goals and specific goals has a lot to do with being customer driven or being Vendor driven. I would suggest that many in the reseller channel remain overly Vendor driven - caught up in programs and policies and NOT spending enough time talking with customers and evaluating what is and isn't working. I would further contend that there is a lot more profit in partnerships and revenue upside for everyone if you follow the customer.

Keith Newman is the Editor and Publisher of ChannelMedia - the Retail Edition. This newsletter is free, courtesy of Vision Events and we are looking for contributors and readers. If you are interested in contributing or sponsoring an article, please contact keithn@telocity.com.

This is your source for the latest, greatest news. Plus, it's free. All from your friends at Vision Events and Newman Media. To subscribe send an e-mail to channel.media@gartner.com.

NEWS

Q&A with Dave Martella, Trinity & Associates
by ChannelMedia Staff

Q. What is Futurecasting and can you tell me who's going to win the World Series and the Super Bowl?

A. Futurecasting is forecasting taken to a new level. Instead of basing projections solely upon historical data, Futurecasting analyzes potential future trends and how they impact the forecasts. The four areas we look at are: Technology Innovations, Consumer Dynamics, Economic Indicators, and Competitive Activities. Much to my dismay (being a San Francisco fan), the Angels win the World Series, and Green Bay defeats San Diego in the Super Bowl.

Q. How important is first to market with new technology?

A. Historically, first to market has been the kiss of death for many new technology companies. The technology didn't die, the company that was first to market did. Technologically speaking, Version 1.0 is rarely successful, and companies that had all their eggs in that basket rarely make it. It is the companies that either improve upon the original, or launch V1.0 knowing that it is a placeholder for V2.0 (and have the funding to survive) are the ones that are successful.

Q. What are some of the more promising areas that we can look to for new products that will make an impact on the retail scene this Q4 and for 2003?

A. It's a little late for Q4, but for 2003 we will see more devices similar to the Archos Multimedia Jukebox, which is basically a portable hard-drive that stores and plays back MP3, Digital Video (MPEG4), and Digital Photos. It can even be used to store basic data. This is actually an example of digital convergence that works! Digital cameras will continue to increase in capabilities while prices continue to come down, and the adoption rate will continue to grow. 2003 won't be the year digital outsells film cameras, but we are getting close.

Q. What products do you expect to see leading the Hit Parade this holiday season?

A. In computing, it is Wi-Fi. Wireless Networking cards, access points, routers, and wireless-enable devices will finally begin to approach the hype of the past few years. In CE, DVD will once again be a huge seller, but unfortunately at very low margins.

Q. Other thoughts and observations?

A. Battery technology continues to be a problem for the industry. Even Lithium Polymer, while significantly better than previous cell technology, doesn't provide the energy to weight ration needed for the portable devices on the drawing boards. Micro Fuel Cells will reach the market in the next 18 months, and will prove to be a disruptive technology. Manufacturers should be spending money now on this technology so they aren't left behind.

Q. Dave, thanks for sharing your insights. Tell us a little more about you….

A. Dave Martella has over 20 years experience in the industry, holding positions in retail operations, marketing, merchandising, strategic development, and advanced technology. Dave is Principal of Trinity Associates Strategic Business Solutions, Ltd. Trinity Associates is a full service consulting company focused on technology and retail. He can be reached at martella@trinityassociates.com.

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NEWS

Retail PC Ads Down, Rebate Offers Up
by Roger Lanctot of Beyen

Niagara Falls, N.Y. (Oct. 31, 2002) - Computer Retailers have once again turned to rebates to drive sales in the face of sluggish demand. The number of ads by Retailers for desktop computers is down 21.4% for the first three quarters of 2002 compared to the year-ago period, but rebate offerings now account for more than two-thirds of all PC offers at retail, up from 53.5% in 2001.

"Retailers and their suppliers continue to rely on rebates and related offers to hit key price points and drive demand," said Roger C. Lanctot, Director of Advertising Analysis for Beyen Corp. "As long as they bring people into the stores, Retailers will continue to hammer away with mail-in, instant and upgrade rebates."

Rebate offers for computer hardware products sold in retail stores were up 10% for the first three quarters of 2002 compared to the year-ago period, while overall computer hardware retail ads only increased 1.5%. Rebates remain the dominant promotional strategy used by Retailers, although non-rebate offers saw a 16.5% gain and accounted for 16.8% of all retail advertised offers.

Digital cameras accounted for the largest share of retail advertised offers at 14.0%, vaulting ahead of desktop computers, which fell to 12.1% of total retail advertised offers. Other categories with significantly increased advertising activity included computer monitors, notebook computers, home networking gear and PDAs.

The data reported here is based on the tracking of retail preprint and run-of-press advertising by Retailers drawn from 102 daily newspapers encompassing 85 U.S. metropolitan areas. Beyen's North American headquarters is in Niagara Falls, Ontario, with its corporate headquarters in Dusseldorf, Germany. For further information contact Roger Lanctot.

Retail Digest: Microsoft, eBay, buy.com, OfficeDepot, PC Connection, Amazon, PC Mall, Key Tronic, Kemper and DataVision Unite

In keeping with its multidivisional sales model, D&H Distributing announces the formation of a dedicated Gaming Division to be launched November 1. Due to new Vendor agreements, D&H will offer its customers the Sony PlayStation1, PlayStation2 and Microsoft Xbox game consoles, plus compatible game titles from SCEA (Sony Computer Entertainment America, Inc.).

The distributor plans to carry additional accessories and third-party software titles in the future to enhance its position as a full-line video gaming distributor. D&H is the first distributor that Microsoft has added for the Xbox since the product's launch in 2001.

Creating Non-Traditional Gaming Opportunities
Teams from both Xbox and PlayStation anticipate penetration into new markets, based on D&H's past success in creating incremental sales for Vendors through its different divisions. The distributor plans an aggressive marketing launch for the new gaming division, which will target non-traditional console gaming channels such as college bookstores, consumer electronics Resellers, and broadband and home-networking Resellers, as well as customers from D&H's Rite2u Web site service.

"We're planning to take console gaming to the next level for our Vendors, and for D&H Resellers in several of our key categories," said Jeff Davis, D&H's Vice President of Sales. "D&H's ability to leverage its varied customer base will bring about opportunities for gaming products in previously untapped markets. This will benefit both our customers and those gaming Vendors which our efforts support."

Dan Schwab, Vice President of Marketing at D&H, cited examples of how customers will benefit from the new division. "With broadband Internet gaming capabilities being realized in the very near future, we see tremendous opportunities for Resellers who offer the PlayStation and Xbox consoles in the computer retail arena," said Schwab. "Home-networking and broadband Internet Resellers already have the distinct advantage of understanding broadband, which will give them a competitive edge in capturing gaming sales."

In addition, D&H plans to roll-out this product category to members of its Rite2u Reseller Web site service, which will include a dedicated gaming section. Rite2u provides participating Resellers a fully populated Web storefront, allowing them to conduct full-scale e-commerce business with no investment, no inventory and no credit risk. Rite2u Resellers will be able to offer their consumers the complete line of PlayStation, Xbox as well as many supporting third-party publishers and accessory products online. Rite2u Resellers receive a commission on every transaction.

Amazon.com recently announced financial results for its Q3 that ended September 30, 2002. Free cash flow was $120 million for the trailing four quarters, compared with negative $301 million for the four quarters ended September 2001. Free cash flow includes cash outflows for interest and capital expenditures and excludes proceeds from the exercise of stock-based employee awards. Common shares outstanding plus shares underlying stock-based employee awards totaled $430 million at September 30, 2002, a decrease of 2% compared with a year ago. Net sales were $851 million, compared with $639 million in Q3 quarter 2001, an increase of 33%, exceeding the company's guidance of between $780 million and $830 million. Operating loss was $10 million, including restructuring-related and other charges of $37 million, compared with a loss of $70 million a year ago. Pro forma operating profit was $27 million, or 3% of net sales, exceeding the company's guidance of between $8 million and $17 million. This compares with a pro forma operating loss of $27 million in Q3 2001, an improvement of over $54 million. Net loss was $35 million, or $0.09 per share, compared with a Q3 2001 net loss of $170 million, or $0.46 per share. Pro forma net profit, which includes interest expense, was $0.4 million, or $0.00 per share, compared with a pro forma net loss of $58 million, or $0.16 per share, in Q3 2001. (Details on the differences between GAAP results and pro forma results are included below, with a tabular reconciliation of those differences included in the attached financial statements.)

"We've lowered prices five times over the last 15 months, and simply put, it's working," said Jeff Bezos, founder and CEO of Amazon.com. "Based on the results so far, we've made the decision to leave Super Saver Shipping -- free on orders over $25 -- in place at least through the holidays."

Today, Amazon.com offers 30% off books over $15, significantly lowered prices on electronics, tools, and best-selling CDs and DVDs, and Free Super Saver Shipping on orders over $25.

Microsoft Corp.'s profits more than doubled from a year ago as a new, controversial software licensing plan helped drive sales and insulate the company from the turmoil hitting the technology industry. The software giant also was able to stem losses from investments. For the three months ended Sept. 30, the Redmond-based software maker had a profit of $2.73 billion, or 50¢ a share, compared to net earnings of $1.28 billion, or 23¢ a share, for the same period a year ago. The results announced Thursday included one-time charges of $291 million, or 5¢ a share, related to weakness in Microsoft's investments. A year earlier, Microsoft wrote down $1.2 billion on investments. Microsoft's fiscal first-quarter revenue totaled $7.75 billion, up 27% from $6.1 billion in sales a year ago. The company surpassed Wall Street's expectations. Analysts surveyed by Thomson First Call had a consensus estimate of 43¢ a share on revenue of $7.1 billion. Microsoft cited a higher than expected enrollment in new, subscription-like licensing plans that require companies to sign multiyear agreements and pay annual fees in return for rights to software upgrades. The new plans also eliminate many discounts that companies could receive when they chose to upgrade. "It was a blowout," said Scott McAdams, Chief Executive of Seattle-based investment research firm McAdams Wright Ragen. "We haven't seen a quarter like this in years," he said, attributing the strong results to the deadline for companies to adopt the new licensing agreements. "But with the deadline past, coming quarters probably won't see that strength," he said. "The bad news is it may not be sustainable," McAdams said. Many businesses and government agencies complained about the new licensing programs, saying they were being forced to subscribe or face significantly higher prices when they were ready to upgrade. "We would go back and change some things about how we implemented the program, in hindsight," said Chief Financial Officer John Connors. "Anybody that's a dissatisfied customer is a concern." The company also announced Windows XP sales have hit $67 million since the new operating system was launched in October 2001. It also saw strong increases in revenue for its MSN Internet access service, as well as a 14% jump in sales for its server software and related products.

Fueled by skyrocketing transaction revenue, online auction giant eBay on Thursday reported record income for its fiscal third quarter, surpassing Wall Street estimates. The company said it earned $61 million, or 21¢ per share, on revenues of $288.8 million, the bulk of it from online transaction revenue that increased 73% over the same quarter a year ago. Per-share earnings were a penny better than the consensus forecast of analysts surveyed by Thomson First Call. In the same quarter of 2001, eBay earned $18.8 million, or 7¢ a share. "We saw double-digit growth in every category," eBay CEO Meg Whitman said. "This validates the company's management of the marketplace through continuously improving the overall trading process." Quarterly revenue was up from $194.4 million in the same period of 2001. Online net revenues in the United States totaled $188.3 million during the quarter. Including advertising and other services, eBay domestic revenues totaled $208.5 million. International transactions produced $75.3 million. eBay said it hosted a record 160 million auction listings during the quarter, a 47% increase over the same quarter a year ago. Gross merchandise sales reached $3.77 billion, a company record. For the first nine months of the year, eBay reported net income of $162.9 million, up from $64.5 million in the same span of 2001. Nine month revenue was $800.2 million in revenue, compared to $529.4 million in the same stretch of 2001. The company said fourth quarter performance should be boosted by the acquisition of PayPal, an online payment service acquired in a $1.3 billion stock swap earlier this month. Nearly two-thirds of PayPal's fee revenue had been generated by eBay auction transactions, and eBay estimates the acquisition will contribute $60 million to $64 million to fourth quarter revenues, despite the phase out of PayPal's gambling business. Whitman said PayPal will soon provide services allowing customers to send and receive currency in euros and British pounds, and will add Canadian and Australian dollars soon. During the first 6 months of 2002, PayPal reported $102 million in fee revenue with an estimated $67.3 million from eBay transactions. Additionally, eBay expects $6 million in fourth quarter revenues to be generated by Billpoint, a subsidiary that processes credit card payments for online purchases and whose operations will be integrated into those of PayPal. Next year eBay estimates net revenues from PayPal/Billpoint operations will be between $300 million and $310 million and on a consolidated basis total eBay net revenues in 2003 will be between $1.77 billion and $1.83 billion.

buy.com and its wholly owned subsidiary United Commerce Service, Inc. (UCS), offering e-commerce solutions to companies providing Internet, wireless and interactive TV applications, today announced a strategic marketing alliance with UGO Networks, Inc., the leading online entertainment network for 18 to 34 year-old men. UCS, which created the online retail solutions technology powering buy.com, will provide a co-branded buy.com store for UGO visitors, offering more than 1.5 million SKUs in 10 categories including top-branded computers, software, electronics, wireless, music, videos, DVDs, games, books and magazines. Under the terms of the agreement, UCS will manage buy.com's inventory, fulfillment, site content, customer service, Web site hosting and e-mail marketing for the CO-branded site. Through UCS's proprietary, Web-based reporting interface, UGO will also be supplied with real-time sales, click-thrus and conversion rates. UGO (pronounced "Yu-Gee-Oh") is dedicated to the diversions young men obsess over: games, girls, movies, TV, music, sports, technology and animation. Offering a unique perspective on pop culture, UGO's content attracts an audience of 18 to 34 year-old men who have embraced the Internet and rely on it for their information, communication and amusement. UGO reaches one in 10 men on the Web with approximately 10 million monthly unique visitors. Consistently placing among the Top 50 Internet Properties according to Media Metrix, UGO is a force in the male focused online entertainment category.

"UGO, buy.com and UCS are the perfect partnership," said Sherman Atkinson, President of UCS. "We will offer UGO site visitors the latest name-brand products in all the categories that matter most to males ages 18 to 34, with a wide selection and more competitive prices than any other store in the world. buy.com products, coupled with the UCS technology and the UGO audience, are a powerful combination."

"By providing UGO site visitors with their own store in which to buy the latest electronics, computers and entertainment products, we feel we have greatly increased the value of our users' experience," said J. Moses, President and CEO of UGO Networks. "Whether it's the hottest game, the latest DVD or top electronics gadget they're looking for, it will be here in the UGO/buy.com store."

One of the original pioneers in the development of online retailing solutions, UCS has set a new standard for e-commerce transactions and created one of the most powerful engines on the market, capable of handling hundreds of thousands of transactions daily. UCS is creator of the proprietary technology powering buy.com, the second largest pure-play online Retailer in the world. UCS offers fully hosted e-commerce solutions for content providers, information portals, wireless service providers and niche e-tailers looking to extend their product offering. Through a "virtual private label" or "co-brand" model, the solution allows companies to leverage their brand and current customers via their own storefront, while at the same time taking advantage of immediate "plug-and-play" e-commerce capabilities that the engine offers.

"Our C3 Internet solution is ideal for Web sites looking to expand their current offering by adding an e-commerce capability," said Keith Allen, General Manager of UCS. "Our strategic partners provide the content and the audience, UCS runs the store, and we both share in the revenue. Plus, it provides for a more enjoyable user experience. It's a win-win for everyone."

In addition to the turnkey "commerce in a box" solution, UCS offers site development, hosting, transaction processing, content management, fulfillment, reconciliation, customer service and merchandising services.

PC Connection announced results for the quarter ended September 30, 2002. Net sales for the three months ended September 30, 2002 increased by $28.1 million, or 9.0% to $341.0 million from $312.9 million for the three months ended September 30, 2001. Net income for the quarter was $2.2 million, or $.09 per share, compared to $2.1 million, or $.08 per share for the three months ended September 30, 2001. Excluding the after tax effects of restructuring costs and other special charges of $718.0 thousand and $1.2 million for the three months ended September 30, 2002 and 2001, respectively, the company reported net income for the quarter ended September 30, 2002 of $2.6 million, or $.11 per share, compared to net income of $2.8 million, or $.11 per share, for the quarter ended September 30, 2001. Net sales for the nine months ended September 30, 2002 were $869.3 million compared to $912.6 million for the corresponding period a year ago. Net income for the nine months ended September 30, 2002 was $383.0 thousand, or $.02 per share, compared to net income of $5.9 million, or $.24 per share for the nine months ended September 30, 2001. Excluding the after tax effects of restructuring costs and other special charges of $1.6 million and $2.1 million for the nine months ended September 30, 2002 and 2001, respectively, the company reported net income for the nine months ended September 30, 2002 of $1.3 million, or $.05 per share, compared to net income of $7.2 million, or $.29 per share, for the nine months ended September 30, 2001. The company previously reported net sales of $291.1 million and net income of $.01 per share for the three months ended June 30, 2001.

Patricia Gallup, Chairman and Chief Executive Officer of PC Connection, Inc., said, "We are encouraged by the improvement in our overall performance. Sales for our public sector segment, GovConnection, Inc., aided by seasonally strong sales to the federal government and education customers, grew sequentially by 50%, to $96 million. Our large account segment, MoreDirect, Inc., grew sequentially by 31% to $70 million. Sales for our small- and medium-sized business segment (SMB), were essentially equal ($174 million) to the sales for second quarter of 2002."

As of September 30, 2002, the number of Outbound Sales Account Managers for all operating segments totaled 511 compared to 496 at September 30, 2001, and compared to 521 at June 30, 2002. Average order size for the three months ended September 30, 2002 was $1,323 compared to $1,259 in the corresponding period a year ago and $1,127 in the three months ended June 30, 2002.

Ken Koppel, President of PC Connection, Inc., said, "Our sales of enterprise server and networking products improved sequentially by 12.1% during the quarter and by 27% from the year ago period. Excluding MoreDirect, our average annualized sales productivity per account manager increased from $2 million in the second quarter of 2002 to $2.3 million for the third quarter of 2002, a 15% sequential improvement. In addition, our SMB segment improved gross profit margins by 72 basis points from 11.61% for the quarter ended June 30, 2002, to 12.33% for the quarter ended September 30, 2002."

Notebook Computer Systems was the company's largest product category, accounting for 16.0% of net sales in Q3 of 2002, compared to 22.5% for the corresponding period a year ago. Desktop/server systems accounted for 14.8% of net sales in Q3 of 2002 compared to 12.0% of net sales for the corresponding period a year ago. Computer system average selling prices (ASPs) increased 2% in Q3 compared to the corresponding period a year ago and increased 2% compared to Q2 of 2002, resulting primarily from a 23% sequential increase in server ASPs.

Gross profit margins as a percentage of net sales increased to 10.9% in Q3 of 2002 from 10.7% in Q2 of 2002. Gross profit margins in the company's SMB segment improved sequentially by 72 basis points while gross profit margins in our Public Sector segment decreased by 37 basis points. As stated in previous releases, the company expects that its gross profit margin as a percentage of net sales may vary by quarter based upon Vendor support programs, product mix, pricing strategies, market conditions and other factors.

Total selling, general, and administrative expenses (SG&A), as a percentage of net sales, were 9.6% in Q3 of 2002, compared to 9.3% in the corresponding period a year ago, and 10.5% in Q2 of 2002. The company expects that its SG&A as a percentage of net sales may vary by quarter depending on changes in sales volume, as well as the levels of continuing investments in key growth initiatives. Patricia Gallup, concluded, "Again, we are pleased with PC Connection's overall performance for the quarter. The investments we have made over the past year, and our efforts to improve the efficiency and effectiveness of our sales organizations, are beginning to produce results. We strongly believe we can continue to enhance our operating performance and build long-term shareholder value."

PC Mall recently reported earnings per share of $0.07 on record Q3 sales of $230 million. This compares with earnings per share for Q3 2001 of $0.05 per share on sales of $172 million. Earnings per share increased 75% from $0.04 per share reported in Q2 2002 on sequential sales growth of 12%. Sales for the quarter increased 34% from Q3 2001 and 12% from Q2 2002. Year-over-year organic sales growth was 16% while sales growth from acquisitions was 18%. Gross profit for the quarter increased by 30% from the comparable quarter last year in close relation to sales. Frank Khulusi, Chairman, President and CEO of PC Mall, said, "As was the case last quarter, we remain one of the fastest growing companies in our industry. Our market share acquisition momentum continued in Q3 2002, and we achieved record third quarter sales despite a challenging technology market environment. At the same time we increased our earnings 55% over Q3 2001. The strength and efficiency of our direct sales model and fulfillment systems and our aggressive spending on sales personnel have allowed us to grow sales and profits in difficult times."

Khulusi continued, "We continued to develop our Outbound small-medium business ("SMB") and PC Mall Gov sales initiatives by fine tuning our systems and processes. Outbound SMB sales rose 40% from last year while PC Mall Gov sales grew 29% in a traditionally strong government spending quarter. We also completed the acquisition of Wareforce, one of the top solutions providers in Southern California, and we are happy to report that the Wareforce acquisition was accretive to earnings in its first quarter with PC Mall."

Consolidated Q3 2002 sales increased 34% from Q3 2001 and 12% sequentially from Q2 2002 to $230 million. Core business Q3 2002 sales increased 15% from Q3 2001 and increased 4% from Q2 2002. Outbound business sales for Q3 2002 grew 37% over Q3 2001 and were up 11% over Q2 2002. Catalog sales increased 3% for the quarter compared to the same quarter last year. The ClubMac and Wareforce acquisitions were responsible for 18% of the year-over-year sales growth. eCost.com Q3 2002 sales increased 23% year-over-year and 10% from Q2 2002. eLinux sales declined nearly half from Q3 2001 and Q2 2002 and were less than $1.0 million for the quarter.

Consolidated gross profit for Q3 2002 rose 30% from Q3 2001 and 9% from Q2 2002. Gross margin for the quarter was 10.7% of sales, down slightly from 11% of sales in Q2 2002 and Q3 2001. Part of the decline reflects growth in lower gross-margin software license sales. The Company's gross profit percentage may vary from quarter to quarter depending on the continuation of key Vendor support programs as well as product mix, pricing strategies and other factors.

Consolidated selling, general and administrative expenses as a percentage of sales for Q3 2002 declined by approximately 50 basis points from 10.5% in Q3 2001 to 10.0%. The decline in spending as a percentage of sales reflected advantages of operating leverage from increased sales, partially offset by increased spending to fund the expansion of the Outbound sales force and the SG&A from the acquisitions of ClubMac and Wareforce. Wareforce's operations remained separate from the company throughout the quarter and, therefore, no incremental benefit from potential synergies was realized.

The company continued to emphasize its enterprise products offerings. The company believes that enterprise products such as networking, servers, storage and licensing products are important for acquiring and penetrating business customers. Sales of enterprise category products were up substantially from Q3 2001. Enterprise products with the highest year-over-year growth rates were licensing (up 116%) and servers (up 109 %). Licensing products benefited from sales of Microsoft Upgrade Advantage, which were stronger than sales experienced in prior quarters.

PC Mall's balance sheet at the end of the quarter remained strong. Cash at the end of the quarter was $9.2 million. EBITDA (a non-GAAP measure of earnings before interest, taxes, depreciation and amortization) for the quarter was nearly $3.0 million. Borrowings under PC Mall's line of credit increased to $8.8 million as of September 30, 2002, reflecting $10.2 million in incremental borrowings to purchase the assets of Wareforce and provide working capital for its operations. Inventories increased $5.0 million from Q2 2002 due to acquisitions and special product pricing opportunities. Accounts receivable increased, up $11.9 million from Q2 2002, due to the acquisition of Wareforce.

"Our record Q3 sales performance reflects the hard work of 1,100 PC Mall employees and their dedication to providing our customers with excellent service," stated Khulusi. "As evidence of our confidence in our employees, business model and ongoing business prospects, we announced in Q3 2002 the resumption of our stock repurchase program, which permits the Company to acquire up to one million shares of its common stock. While there is no guarantee of the exact number of shares that we will ultimately repurchase under the program, we believe our shares are very attractive at current trading levels and, therefore, we plan to continue with our share repurchase program into Q4 2002 and beyond."

Office Depot posted a rise in third-quarter earnings, as international sales offset weaker results in its North American retail business. The office-products Retailer reported profit of $88 million, or 28¢ a share, compared with $62 million, or 20¢ a share, in the same quarter last year. Analysts polled by Thomson Financial/First Call had expected earnings of 27 cents a share. Office Depot said revenue rose to $2.87 billion from $2.76 billion. The company said cost controls are helping boost margins, but that it expects "some pressure" on fourth-quarter operating margins. The Retailer has been closing unprofitable stores and strengthening its marketing, as well as selling more goods such as printing papers instead of big items such as personal computers.

Top retail store chains Wal-Mart, Toys R Us and KB Toys have all refused to sell video game developer Acclaim Entertainment's "BMX XXX" title, saying that nudity and vulgarity contained in the game is inappropriate for their shelves, Reuters reported. The game lets players perform BMX bike tricks and also features strippers, prostitutes and pimps as characters. "We're not going to carry any software with any vulgarity or nudity -- we're just not going to do it," Wal-Mart spokesman Tom Williams told Reuters. Retailer Best Buy said it will sell a censored version of the game for Sony's PlayStation 2. "I still believe that we'll get substantially full distribution in the United States," Acclaim CEO Gregory Fischbach told Reuters. "I don't really think it goes much further than some other video games on the marketplace." Another title, Rockstar Games' top-selling "Grand Theft Auto," was banned in Australia due to its violent and sexually-themed content. "We have no intent to change the content of the game," Fischbach added.

Retail Solutions and National Retail Services Partner
Retail Solutions International and National Retail Services recently announced an exclusive partnership focused on providing the highest value retail merchandising services. by integrating RSI's RS-NetTM Web based point-of-sale (POS) data warehouse solution with NRS' suite of merchandising solutions, customers can now experience "one-stop shopping" for the entire suite of category management and merchandising solutions. As part of the alliance, National Retail Services will be utilizing RSI's RS-NetTM POs technology to augment their service offering, optimize their service utilization, and to provide a full spectrum of category management services. Now, NRS can add retail performance reporting and measurement to their comprehensive set of merchandising services. In addition, RSI will be utilizing NRS field resources to supplement their POs based replenishment program to ensure effective store level execution.

"NRS' emphasis on return on investment and their partnering approach with clients made this an ideal opportunity for RSI," says Ramesh Murthy, Chief Operating Officer of Retail Solutions. "This partnership will allow our customers to truly realize the benefits of data-driven retail merchandising."

"NRS has always maintained strong, strategic relationships with our clients", says Bill Fasano, President of NRS. "The Partnership with RSI will allow us to carry that relationship to the next level. We will now not only be able to monitor true return on investment for our clients, but we will also be able to target our coverage to the stores with the greatest need. This is more than just retail merchandising; this is strategic field marketing."

RSI's RS-NetTM tool suite is currently utilized by over 50 of the largest consumer goods companies. It allows users to access their Retailer POs data by store, by SKU, by day in real time via the Internet. The application provides key insights to a company's sales performance, operational performance that supports the merchandising solutions provided by NRS. The partnership between RSI and NRS will provide ongoing partners of both firms with one source for in-store/shelf condition data and POs data. The marriage of this data is invaluable in determining program effectiveness.

Comdex Speakers Announced
Key3Media Group has announced a world-class roster of keynotes for COMDEX Fall 2002 that includes Microsoft, Hewlett-Packard, Sun Microsystems, National Semiconductor, AMD, News Corporation, RSA, Network Associates, VeriSign, Nokia, Internet Security Systems, Counterpane Systems, Wolfram Research and an influential U.S. Government Official. COMDEX Fall 2002 runs November 17-21, 2002 at the Las Vegas Convention Center, Las Vegas.

"The global IT industry comes to COMDEX Fall annually because this is where IT leaders set the tone and the agenda for the coming year, where new products are launched and where buyers and sellers can meet face-to-face," said Mike Millikin, Senior Vice President, COMDEX Worldwide. "This year we have an outstanding keynote program, a multitude of new products, world-class conference programs, and a dynamic show floor to ensure that buyers and sellers enjoy the experience they have come to expect from COMDEX."

To address the IT industry's challenging times and its upcoming road to recovery, Key3Media Group has invited Carlos Bonilla, Special Assistant to the President, National Economic Council. Mr. Bonilla will participate in the keynote series on Wednesday, November 20, with reflections and comments on what lies ahead for the global IT marketplace.

Key Tronic, an emerging leader in electronic manufacturing services (EMS), said that for the first quarter of fiscal 2003, Key Tronic reported total revenue of $34.0 million, compared to $34.6 million for the first quarter of fiscal 2002. Key Tronic's sales growth has been adversely impacted in recent quarters by uncertainty created by the litigation involving F&G Scrolling Mouse, LLC ("F&G"). In a separate press release today, the Company announced that it had reached a final settlement with F&G. As a result, Key Tronic reported a $12.2 million benefit in the first quarter of fiscal 2003, which reflects an adjustment to the $20.2 million of litigation expenses previously reported in fiscal year 2002. In addition, the Company has reported on its balance sheet short-term and long-term liabilities totaling approximately $7.2 million related to the settlement and associated legal costs, which will be paid to F&G in quarterly installments over the coming years.

"The litigation had an adverse impact on our business in recent quarters and we are very pleased to reach a settlement," said Jack Oehlke, President and Chief Executive Officer. "In the face of the uncertainty created by the litigation, we took the necessary steps to reduce our operating overhead and we are pleased to see the improvement in our gross margin and profitability in the first quarter of fiscal 2003."

Kemper and DataVision
One of New York City's largest independent computer/video Retailers, DataVision, has signed a contract with Kemper/Service Net to sell service contracts online and at the mid-town Manhattan superstore. Contract coverage options include both break/fix and full-replacement options with duration of either one or two years after the manufacturer's warranty expires. Service Net will manage claims processing on all products sold under the program, which include desktops, laptops, TVs and all consumer electronics. As part of the agreement, DataVision will become a service partner for Service Net, providing repairs for the contracts sold through DataVision. "This partnership with Service Net will help to create the ideal customer solution," said James Garson, Chief Executive Officer of DataVision. "Not only will our customers have excellent 24-7 support from Service Net, but they also will receive service for their products from DataVision." Service for customers outside of DataVision's service area will be handled through Service Net's nationwide network of more than 35,000 certified and factory repair technicians.

"DataVision will be a valuable asset to our network of service technicians," said Kevin Callahan, President of Service Net. "We're always looking for ways to expand our service network, to ultimately provide more and better service to the customer."

Dale Communications (DCOMM), a wireless communications company specializing in the distribution of Bluetooth™ enabled devices to the U.S. marketplace, today announces its first product, the BlueTrek™ wireless headset from European manufacturer, Innovi. Exclusively distributed in the U.S. through DCOMM, the SRP is $119 U.S. for the BlueTrek headset with charger and is now available to Retailers nationwide. BlueTrek's discreet design is much less bulky and weighty than other comparable wireless headsets. Weighing in at less than one ounce, the BlueTrek headset comfortably slips on and off either ear without adjustment, and stays firmly put when on the move. The BlueTrek is an easy to use headset with two straightforward controls for volume adjustment and call answering/disconnecting. Voice activated calling, completes the hands free experience. For use up to 30 feet away, the BlueTrek headset boasts two and a half hours talk time or up to two days standby before recharging is required. Designed to work with any Bluetooth-enabled mobile phone or in conjunction with an inexpensive Bluetooth adapter, the BlueTrek headset offers great quality with the latest in Bluetooth chip technology from Cambridge Silicon Radio. BlueTrek is fully compliant with the Bluetooth version 1.1 specification.

Shutterfly and Best Buy Partner
Shutterfly announced a joint program with Best Buy to sell its first retail product in Best Buy's more than 500 retail stores in 48 states. The announcement reflects a broadening of the alliance between the companies, who have been working together to make digital photography more accessible to customers since the creation of the Bestbuy.com Photo Center powered by Shutterfly in 2000. Beginning this week, customers who spend more than $49 in a Best Buy store have the option to purchase a $25-value Prepaid Print Card for $9.99, which credits them with high-quality 4x6 prints redeemable at the Bestbuy.com Photo Center.

"Digital cameras and related products are some of Best Buy's most popular sellers, especially for the holidays. In fact, Dataquest research shows that 50% of U.S. households will own a digital camera by 2006," said Scott Bauhofer, Senior Vice President and General Manager of Online Stores for Best Buy. "We are delighted with the print card offering because it gives customers an easy solution for receiving film-quality prints from a digital camera."

Additionally, Shutterfly and Bestbuy.com will include a special offer in shipments to all customers who make a purchase on Bestbuy.com (excluding music and movie sales) during the holiday season. Customers will receive a coupon for 15% off any order of prints or photo products from the Bestbuy.com Photo Center.

"A major hurdle for the digital imaging industry has been the absence of an industry-led education initiative to drive consumer awareness about the benefits of the digital world - our program with Best Buy clearly fills that void," said Andy Wood, Shutterfly's CEO. "Shutterfly's relationship with Best Buy offers an exciting opportunity to grow the digital market both on- and offline.

SELLING AT RETAIL

A Sales Spike is Not Enough: Gaining Maximum Impact from Promotional Marketing
by Beverly Ham, BDS Marketing

Chapter 5 from "The BDS Guide to Point of Contact Marketing"

Diana Rouse, Manager of Retail Channel Marketing Programs for Canon USA, is an enthusiastic believer in the efficacy of promotional marketing. Yet she is equally convinced that many campaigns fail to achieve their potential impact.

"It's undeniable: A good promotion can heighten awareness and measurably boost retail sell-through. But a great promotion can do that and much, much more."

Brand marketers in the technology and consumer electronics industries observably recognize the value of promotional marketing, whether targeted toward consumers or the trade. Sweepstakes, contests, coupons, sales incentives, special events, gifts and other promotional tactics have become essential weapons in their sales and marketing arsenals.

Yet all too often, their campaigns fail to take full advantage of the myriad opportunities presented by a creative promotional marketing program. Some focus exclusively on consumers and ignore the (often-influential) retail sales associate. Others seek only to reach consumers outside the store and neglect to motivate them at the point of sale, where the vast majority of purchase decisions are actually made. Some limit themselves to isolated "one-off" campaigns and overlook the brand- and relationship-building potential of regularly scheduled promotions and events.

Many simply use price incentives, such as mail-in rebates, to generate a short-term spike in sales. But there are clear downsides to this approach. Promo Magazine, a leading industry journal, noted that "historically, rebates mix the worst of both worlds: As price discounts, they commoditize a brand, but leave consumers grumbling because they are troublesome to redeem."

Promotional marketing plays a central role in many, if not most, of the Point of Contact (POC) Marketing programs developed and implemented by BDS Marketing. Our approach is based on the conviction - gained through years of experience developing and executing literally hundreds of campaigns - that a well-conceived promotion can achieve multiple objectives simultaneously. Our programs typically reach diverse audiences and achieve two or more mutually supportive goals.

For example, driving short-term sell-through and building long-term brand equity are not incompatible goals. And the most successful promotions demonstrably benefit the Retailer along with the manufacturer -- helping transform relationships into true partnerships.

When planning a promotional marketing campaign, we typically begin by working with our client to answer a series of questions we call "The 5 Ws":

Why are we considering a campaign? It's useful to begin by looking at the big picture and clearly defining the campaign's principal intent. Exactly what are we hoping to accomplish? Generate excitement and stimulate sales of a new product? Counter a competitor's efforts? Cleanse the channel of an existing model in preparation for a product introduction? Enhance relationships with an especially important Retailer? Encourage use of complementary high margin products, such as consumables or accessories? A campaign with clearly defined goals is much more likely to succeed.

Whom are we hoping to influence? All consumers? A certain category of consumers? Retail purchasing executives? Store managers? Retail sales associates? A well conceived campaign can be effective in reaching a mass audience, especially if it is generously funded. But a more narrowly focused campaign can deliver a powerful return on a much smaller investment. We've found that the best promotions focus on influencing a carefully targeted audience demographic.

What do we want these people to do? Provide valuable real estate on the retail floor? Recommend a particular product to an undecided shopper? Visit a store to view a product demonstration? Purchase a particular product…or ancillary item? (We once ran a campaign for Canon that not only boosted sales of key printer models; it also stimulated printer use, which led to increased sales of consumables such as paper and ink.)

When do we want them to do it? by definition, a sales promotion has limited time parameters, so it is important to determine when the campaign will have the greatest impact. Seasonal campaigns have proven their effectiveness. It also is critically important to plan the campaign well in advance, e.g. to ensure inclusion in advertising circulars.

Where do we want them to do it? Extensive, nationally based promotions, usually driven by major mass media advertising campaigns, have demonstrated their ability to generate consumer awareness and drive traffic to stores. In-store promotions give sales people a potent tool for closing sales and can powerfully influence consumers when it matters most -- at the point-of sale.

It's important to carefully consider the communication elements of your campaign. A promotion won't succeed if people aren't aware of it. External communications --advertising and, to a lesser extent, public relations -- play an essential role in creating visibility and stimulating consumer traffic. In-store communications that influence shoppers at the point of purchase are equally important. Companies that deploy sales professionals on the retail floor have an enormous advantage in this arena. They can ensure that collateral and P-O-P materials are properly displayed. They also can meet with retail sales associates to ensure their understanding of the campaign, and even present a complementary trade promotion to boost their interest and involvement.

In the past, companies usually sought to produce and implement uniform in-store promotions, i.e., "one-size-fits-all" campaigns that are identical throughout the nation and from one Retailer to the next. While such campaigns offer some advantages, such as economies of scale, current Retailer philosophies and policies are making them increasingly problematic for all but the largest and most powerful manufacturers.

For example, Retailers are focusing increasing attention on their own brand identities…and they recognize that stores can serve as a potent communication channel and branding platform. In response, many have become restrictive regarding the kinds of point-of-sale material they'll permit in their stores. "Clean store" policies, which prohibit the use of in-store marketing materials by manufacturers, are becoming commonplace, and many Retailers require customized programs that support their own marketing priorities. It's not uncommon to see a Retailer's brand prominently featured in a manufacturer's promotional marketing campaign.

In response to these trends, we frequently propose account-specific promotions tailored to meet the needs of both manufacturer and Retailer.

Account specific promotions appeal for a variety of reasons. Retailers not only allow such campaigns; they usually welcome them enthusiastically, since they reinforce the Retailer's own marketing activities and contribute to competitive differentiation. Account-specific promotions are especially popular with companies that consider good relationships with Retailers a top priority.

When developing an account-specific promotion, it's important to be familiar with the Retailer's management team (both corporate and store-level), marketing calendar, floor layouts and POP and merchandising policies. This underlines another advantage of having representatives visit stores on a regular basis. These reps are intimately familiar with the retail terrain, understand the store's customer demographic and can evaluate a campaign's impact first hand. Ideally, they enjoy solid, trust-based relationships with the store manager and other key players, enabling them to gain Retailer cooperation and support.

Promotional marketing has unquestionably demonstrated its value as a sales and marketing tactic. Yet brand marketers should remember that a "good" promotion is not enough. With careful planning and solid execution, promotional campaigns can achieve multiple goals, from dramatically boosting sell-through to solidifying Retailer relationships. And, like other elements of a strategic POC Marketing program, they can deliver a powerful return-on-investment.

Beverly Ham is chairman and CEO of BDS Marketing, one of the nation's leading sales and marketing service firms. Founded in 1984 as a field marketing agency, BDS has since helped pioneer the field of Point of Contact Marketing and today delivers measurable results for clients such as AT&T Broadband, Motorola, Philips Electronics, Xerox, Sharp Electronics and Canon. Contact: (949) 472-6700, ext. 1231, or Beverly@bdsmarketing.com.

This article is the fifth in a series entitled "A Road Map to Sell-Through: The BDS Guide to Point of Contact Marketing." To view previous articles, please click on a link below.

Previous Articles
Article 1: Driving Sales While Building Brands
Article 2: The ROI Imperative
Article 3: Professionals Only, Please: The Essential Role of the Field Staff
Article 4: Information at Your Fingertips: The Power of Field Intelligence

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RESEARCH

Real-time Inventory: The Real Challenge Behind Web Retailing
by Geri Spieler, Gartner

Viewpoint

Retailers must be capable of managing Web orders in real time. The success of their Web channels depends on it. Current retail supply chains are unable to manage inventory in real time and will require significant investment.

Dynamics

Predictions

Recommendations

Dig Deeper

Viewpoint

Manage Web Orders in Real Time—Your Success Depends on It

The challenge behind Web retailing is not what appears on a browser. Many Web Retailers are falling short when it comes to booking and fulfilling an order; that is, the basics of order management.

Dynamics

Retail Infrastructure isn’t Designed for Managing Online Orders

Managing the real-time inventory processes required for successful Web retailing is currently beyond the scope of many Retailers’ infrastructures. To get around this problem, Retailers have invested in expensive “safety” inventory practices or have communicated to customers that items are on backorder.

Why is online order management so challenging? Retailers have already invested significantly in eliminating excess inventory and stock-outs in their stores. A backorder on the Web is essentially a stock-out at an individual customer level. The fact is that Retailers cannot remedy the Web backorder problem with the supply-chain practices they have so diligently implemented to avoid stock-outs in their stores.

Over the past decade, Retailers have implemented:

• Continuous replenishment.
• Vendor-managed inventory.
• Distribution and store-level planning practices.

All are designed to work at a store level, not the individual consumer level.

To be successful with their Web channels, Retailers need to reserve inventory based on a real-time inventory of available-to-promise goods—a practice that their suppliers have been struggling with for years.

Different Real-time Solutions for Different Retailers

Different companies require different e-fulfillment solutions. The breadth, depth and specific functionality for online ordering heighten the competition.

For most Retailers, real-time inventory systems let companies reserve orders at the time of selection. This visibility is crucial to the trust of the consumer. Unless a company can see what inventory is in the channel, it cannot reserve stock or control replenishment internally or for those they supply.

Because of this, Retailers have built real-time e-fulfillment systems to fit their specific operations:

• The cost of a real-time order management system is between $500,000 and $1 million for large, Fortune 1000 retail companies. These are retail companies that have added a high-volume Web channel and are in the process of implementing a more responsive order management system with real-time capability.
  
  
• Despite online ordering pressures, only 20% of customer orders over the Web complete the entire order management and fulfillment process electronically. Because of this, what should an electronic real-time order reservation function do? At the minimum, a customer must be able to reserve an order online in real time. As the customer confirms the order online, the system will, in real time, store the order and reserve the inventory. The order is then visible to any telephone operator, as well as online through the customer service function.

Predictions

• By 2004, only 40% of Retailers with online channels will have integrated realtime inventory processes. The cost of real-time systems, integration difficulties and supplier relationships will prevent many Retailers with online channels from integrating a real-time inventory processes, according to a report published in the October 2001 issue of Integrated Solutions Magazine.

Recommendations

Dig Deeper

Related Research from GartnerG2

Report: 15 Best Practices to Improve Web site Usability
by Geri Spieler (16 July 2002)

Report: Retail Optimization: Making Sense of It All
by Hung Lehong (20 May 2002)

Gartner Core Research

E-Commerce Services Initiatives: A Demand-Side View
by Alex Soejarto (30 March 2001)

Summary: E-commerce was the driving force behind the first wave of Internet adoption. Though the perception of this Internet-enabled process has soured, opportunity for service providers continues. End-users will invest in this process area, though requirements will become more focused and demands will be made for measurable project success.

Methodology

Information in this report was gathered from GartnerG2 interviews with executives at 10 retail businesses that have installed new real-time inventory processes or are considering and researching new inventory processes.

To subscribe or see archived issues of ChannelMedia please visit www.channel-media.com. We welcome your input, submissions and questions.

RESEARCH

Ultra Small Form Factor PCs - Do Good Things Still Come in Small Packages?
by Toni Duboise Desktop ARS PC Analyst

In today's corporate desktop market, it appears the only thing shrinking faster than razor-thin margins is the size of the computer itself. In homage to the mantra - "good things come in small packages"- Small Form Factor (SFF) chassis have morphed into Ultra Small Form Factors (USFF) with computer boxes no larger than a Webster's hardbound dictionary. IBM's most recent foray into the Ultra Small Desktop market gives impetus for further investigation of the minimalist phenomenon. With IBM's recent release of its condensed NetVista S42, corporate IT buyers now have a trio of USFF desktops from which to choose. The 'new HP' produces the other two - the original, newly renamed Compaq D510 e-PC (formerly HP e-PC) and the Compaq D510 Ultra Small Desktop (USD). All three companies - HP, pre-merger Compaq and IBM - introduced their USFFs to satisfy an overwhelming consumer demand for an ultra space saving alternative. This same desktop real estate conservation exercise has been previously addressed by the Ultra Small Form Factor's predecessor, the Small Form Factor, introduced in 1998.

Though any 'real estate savings' may have a welcome ring to it these days, one can only muse that it is not necessarily the dimensions of corporate cubicles that are declining during the prevailing economic hardships, but rather the scope of employee rosters and allocated budgets. It is this hypothesis that leads me to wonder why corporate IT buyers remain unsatisfied by the variable array of SFF desktop units already offered by PC manufacturers and why PC manufacturers are rushing to appease this perceived need. And, more importantly, who wins? To answer these questions, let us first examine the existing diminutive products offered. All three USFF units have a small, smart profile and are equipped with various unique features, some of which are highlighted below.

The Evo D510 e-PC offers the tiniest chassis, measuring 12.2 x 3.8 x 9.8 inches, with a one-screw lockable security solution and a companion mounting bracket assembly that allows the user to attach the minute system either under the desk, on the wall, or tuck it neatly behind a flat screen display. The omission of the floppy drive adds to the e-PC security factor.

The Evo D510 USD is the slimmest in width with 12.2 x 2.7 x 12.4 inch measurements. The Ultra Small Desktop offers wireless capabilities and swappable multi-bay optical drives that are interchangeable with select members of its corporate notebook brethren.

IBM's newcomer NetVista S42, while not quite as minute as its existing competitors at 12.2 x 3.3 x 13.6 inches, also offers wireless capabilities and is the first USFF to accommodate a full-size optical drives, two full-size PCI card slots and a CD-RW/DVD combination optical drive option. All systems target international corporate PC markets with a three-year warranty, common software images within correlating product lines, and various security and migration packages. As for the processor mix and correlating price points offered by each of the three USFF machines, they tend to vary as much as the aforementioned features. In terms of processors, the USFF systems are not nearly as limited as when first introduced with perhaps one or two processor options. The e-PC offers the broadest performance range beginning with an entry-level 1.8GHz Celeron and topping out with a high-end 2.6GHz P4. All other S42 and D510 USD units are equipped with a more narrow range of high-performance P4 processors ranging from 1.7GHz to 2.53GHz. (The e-PC is currently the only USFF offering an entry-level Intel Celeron processor option, albeit Celeron chips are included in IBM's S42 future road map.)

In terms of price, HP's Evo D510 e-PC and USD base configurations can be purchased with 128MB RAM, 20GB hard drive and Windows XP Home for as low as $698 and $730 respectively. IBM's NetVista S42 starts at a base price of $929 based on an enhanced base component threshold, including 256MB of RAM, 40GB hard drive and Windows XP Pro. In order to provide a more comparable USFF assessment of price per performance, both the D510 e-PC and USD have been configured with similar stepped-up feature sets as reflected in the chart above. Even with similar configurations, IBM's initial S42 pricing appears to be at a premium of $100 to $111, and HP's D510 USD is even higher still. But based on the uniqueness of each of the USFF systems, it is up to IT buyers to determine if the integrated features are reflected in value as measured by price. Still, the most interesting price/performance comparisons are produced by comparing the USFF systems to their SFF counterparts. The chart below reflects such a comparison for the two systems offered in both USFF and SFF chassis options - IBM's NetVista and HP's Compaq-branded Evo D510 series. IBM's NetVista series offer comparable feature sets within USFF and SFF units with USFF savings ranging between $27 and $157. HP's Evo D510 offers much more limited USFF selection with its D510 USD, but the ultra small savings are still present at $46 for the 1.9GHz P4-powered solution. It should be duly noted that oftentimes both USFF and SFF series still command a premium over ordinary desktops offered in tower, minitower or desktop form factors.

This is your source for the latest, greatest news. Plus, it's free. All from your friends at Vision Events and Newman Media. To subscribe send an e-mail to channel.media@gartner.com.

RESEARCH

Wireless Carriers Look for Ways to Drive Data Adoption
by Weston Henderek, Industry Analyst, Mobile Wireless

One of the biggest obstacles facing wireless carriers looking to gain more revenue via combined wireless voice and data services has been on the price side. While there has been little compelling data content to tempt a large audience, it is still cost uncertainty that is keeping customers from making the investment. Currently in the U.S. market most wireless carriers price combined voice/data plans in a very similar fashion to each other. The data portion of the plan is added as a "bolt-on" option sold by the megabyte, and customers have a range of options to choose from. This structure is confusing to the average user who may be unclear as to what can be done with a megabyte of data. Since listing data by the megabyte is hard to understand and seems very arbitrary, customers always have the fear of going over their data allotment and having to pay extra money each month. Unlike voice plans where it is easy to keep track of the number of minutes used, data is difficult to track because of the variance in bandwidth usage for different applications. For example, sending and downloading pictures over a wireless data network uses a dramatically higher amount of kilobytes than sending text messages. This fear of "overage" usage prevents customers from using the service.

ARS believes that in order to drive data adoption, carriers will need to move to a flat rate usage fee. In this respect, Sprint PCS and T-Mobile have now launched converged voice and data offerings that offer unlimited wireless data usage for a fixed monthly fee. The T-Mobile converged voice/data plan comes bundled with the new Sidekick hiptop device, and is termed the Sidekick plan. The plan includes 200 anytime national voice minutes, 1000 national weekend minutes and unlimited GPRS data access for a price of $39.99 per month. This plan will be compelling to consumers because it hits a price point sweet spot, and also eliminates the uncertainty about how much data can be used. Sprint PCS on the other hand, has taken the concept of unlimited data one step further with the launch of a new Free & Clear rate structure on October 21, 2002. Under the new structure, Sprint is offering unlimited CDMA 20001X PCS Vision data service usage for a fixed rate of $10 per month on plans priced between $30-$60. Sprint PCS is also offering free access to the unlimited data service for the first 3 months on those plans. On plans above $85 per month, the unlimited PCS Vision data service is included at no additional cost for as long as the user has service. Verizon Wireless offers a similar plan with its Express Network national plans which allow users to utilize minutes for either voice or data service. However, the combined service plans from Verizon Wireless are priced significantly higher than the comparable voice plans and do not include any off-peak minutes. The only other offerings that appear competitive to the Sprint PCS and T-Mobile offerings from a data perspective are the RIM Blackberry devices running on Ardis and Mobitex data networks. Blackberry users generally pay a flat rate of $40/month for unlimited data access via the RIM device. RIM Blackberry subscribers are mostly corporate users looking to access Microsoft Outlook e-mail, whereas the T-Mobile Sidekick plan and Sprint PCS Vision Plans are targeted much more toward consumers and offer things like photo sharing (impossible with Blackberry). With the Sprint PCS Vision plans and the T-Mobile national Sidekick rate plan, consumers will have a much more compelling reason to use data services. Not only that, but also this offering will cause all other carriers to take a closer look at their own voice/data strategies. ARS believes that other leading carriers like AT&T Wireless and Cingular will initially just watch the Sprint PCS and T-Mobile offerings to see what the reaction will be before they launch anything comparable. ARS believes that the U.S. Wireless industry in general is headed towards this converged offering with flat rate data. However, whether this is a good long-term strategy for the carriers remains to be seen. The downside to an unlimited offering is that customers may use a high amount of data and as a result will cause network congestion and reduce carrier revenues. This is a valid fear, especially with the advent of MMS services and perks like photo sharing and video messaging, which require a huge amount of bandwidth. If you look at the $40 price point for both the Sprint PCS and T-Mobile plans, it appears that it is comparably priced to offerings from other carriers that only offer 2 Megabytes of included data. In this respect, Sprint PCS and T-Mobile customers must average no more than 2-8 megabytes of data usage per month for the carriers to make money. This strategy may work in the short term for carriers like Sprint PCS and T-Mobile who are looking to drive data usage and steal as much market share as possible. The "unlimited usage" pricing concept can also provide valuable insight as to what customers will pay for specific data services. In the end, the popularity in the types of next generation data services and usage patterns will dictate how much is charged for 2.5G and 3G data services. But for now, the trend will be to offer unlimited data service in order to drive adoption.

RESEARCH

Consumers Want More Product Information

A new survey released by the Consumer Electronics Association (CEA) shows consumers need more information before the sale in order to reduce product returns. On average, 7% of products sold to consumers at the retail level, representing $6.7 billion in manufacturer-to-dealer sales in 2002, are returned to either Retailers or manufacturers. The most common reasons cited for returning these products were that, "the product was broken" or "it did not work like I thought it would." However, with the product defect rate for consumer electronics at less than 4%, many of these returns are not actually due to faulty products, but rather "operator error," meaning that the consumers did not know enough about their product to operate it properly. In the cases where a product actually did fail, nearly half of consumers (48%) purchased a replacement product.

According to consumers, getting more information about products, either before purchase or at the point of sale, will help reduce return rates. Of those surveyed, 20% said consumers should do more research before making a purchase. Better pre-sale information from sales staff (16%) and more informative in-store displays (14%) also were cited as ways to reduce returns. While the majority of buyers are satisfied overall with return processes, a significant number of consumers are expressing frustration with industry polices. Nearly 60% of consumers surveyed said they were satisfied with the return process, compared to 78% in 2000. Survey respondents cited higher dissatisfaction rates because 1) there is a perceived higher volume of returns; 2) it seems to take longer to get a product returned; and 3) consumers feel returns policies are becoming more restrictive.

by product category, in-car electronics had the highest rate of return (11%) with audio products having the lowest rate (5%). Eight percent of communications products, 7% of video products and 6% of PC/video game products were returned.

The "Return Rates and Issues" survey was conducted via telephone interview to a representative sample of 1,000 U.S. adults during September 2002. The complete study is available free to CEA member companies. Non-members may purchase the study for $499 by visiting www.eBrain.org or sending an e-mail to info@ebrain.org.

RESEARCH

Does SBC DSL Offer More Value with a Yahoo! Partnership?
by Bruce McGregor, Broadband/DSL & Networking Research Analyst

SBC Communications and Yahoo! officially launched their CO-branded DSL services for residential and business use on September 13. Over 35 million SBC customers in 13 states are eligible to receive the SBC Yahoo! DSL service, which will also soon be made available to the 1.7 million SBC DSL customers through subsidiaries Ameritech, Nevada Bell, Pacific Bell, SNET and Southwestern Bell. by partnering with Yahoo!, SBC is looking to catch up to cable rivals such as Time Warner Cable and Comcast who collectively control nearly two-thirds of the broadband market.

A number of critics argue that broadband adoption rates will not increase until the quality of the content that requires a broadband connection improves. Yahoo!, with its wide array of content and other value-added features, is making a bold move towards the consumer broadband market in a partnership with the leading U.S. DSL provider.

After the dot com fall out, Yahoo! scrambled to gain lost revenues from the drop in advertising with premium pay services. Many of Yahoo!'s first attempts to offer pay services - such as charging for POP e-mail accounts and added e-mail storage that at one time were free - have not been very well received by the millions of Yahoo! customers who have grown accustomed to free services.

Now Yahoo!, with the DSL service offering, has an effective vehicle to offer services at a fee because consumers are already used to paying for broadband access. Rather than merely offering DSL access, Yahoo! is also giving exposure to many of its media applications and content. For new customers, Yahoo! is offering premium services with a 3 month free trial and annual services at a 20% discount.

The SBC Yahoo! DSL service is adequately priced with the initial cost of $29.99/month for the first 6 months of service. This is a good price point to attract dial-up customers that on average pay in excess of $20/month for a service that offers bandwidth that is seven times slower.

SBC Yahoo! DSL Pricing: § DSL Basic Package up to 384K x 128K for $42.95/month with $29.95 for 6 months promo § DSL Standard Plus Package 384K to 1.5M x 128K for $49.95/month with $29.95 for 6 months promo § DSL Deluxe Package 768K to 1.5M x 256K for $59.95/month with $39.95 for 6 months promo.

Besides the value of a low introductory price, SBC regular pricing stays the same with a repackaged Yahoo! DSL service with added value to the consumer that includes a host of features from one of the leading content providers on the Internet today. The revamped DSL service is offered with a new browser that links all of Yahoo!'s features onto one browser page, exclusive to SBC Yahoo! DSL customers. The new browser provides a Super Web Cam feature that allows them to e-mail and Yahoo! Messenger video and sound messages. The new browser provides 10 e-mail accounts, 150 to 500 megabytes of storage space for files and photos, Norton Anti Virus protection, a firewall solution, unlimited remote dial-up access and parental controls. Other perks include the ability to list items on the Yahoo! auction site at no cost, a free 3 month trial of Bill Pay for online banking and the option to try out Yahoo!'s games-on-demand package that gives users the ability to rent popular video game software available on Yahoo!'s Web site. Other value-adds with this service include 3 Consumer Reports and 5 Market Guide Provestor Financial Reports. Current SBC DSL customers will eventually receive a CD-ROM with the new software to upgrade to the Yahoo! DSL browser.

The Yahoo! DSL browser offers similar features to those of its rivals AOL and MSN, but is built specifically with high-speed users in mind. The browser contains high-speed media features of video and sound with LAUNCHcast Radio Player browser and is also a departure from Yahoo!'s portal-only model. Yahoo! is hoping to have the same success that AOL has experienced with its browser in the dial-up space for many years.

A sleek-looking browser with all of Yahoo!'s bells and whistles may not be enough to persuade new users and dial-up loyalists to make the leap to broadband. Many other broadband providers have failed to make an impact in subscriber numbers by offering media and content. Speakeasy.net has not seen a huge rise in subscribers by offering DSL service custom made for video gamers and music MP3 junkies. Qwest Communication's DSL subscriber numbers have declined with an MSN CO-branded DSL product. SBC does have an advantage over Qwest because SBC's territory includes a larger population and Qwest is struggling to recover from financial troubles. A challenge will be to persuade the long-term dial up customers that now is the time to make the switch to DSL. At first glance, $29.99 per month seems like a great price for DSL, but it remains to be seen whether that promotion alone will be enough of an enticement to convert the masses to DSL.

ARS has seen throughout the adoption of broadband that market price is perhaps the single largest factor in a consumer's decision of which provider to choose. If Yahoo!'s DSL browser is robust enough it could potentially capture the market due to the combination of high speed and ease of use. A quality DSL browser with excellent features like Yahoo!'s premium media and content could help convince users to drop the slower AOL dial-up browser and the clunky Microsoft Internet Explorer.

SBC Yahoo! DSL is an attractive new service to broadband-hungry consumers, backed by a high quality SBC DSL network. Yahoo!'s existing reach in the Internet community allows easy promoting of the service. While it is not yet clear whether the Yahoo! content offerings will be a sufficient enough boost to the existing SBC DSL product to help win the battle against cable, ARS believes that such CO-branded offerings are essential in the larger war of further U.S. consumer broadband adoption.