Forecast 2003: It gets better but without a key new technology or market to help boost the economy we merrily plod along. The standard operating model at retail will continue to evolve into a consignment model. The focus: Reduce costs, Avoid risk and spend only where there is a guaranteed ROI. Hopefully, as Retailers get products for free, they will also create more shelf space for Vendors who provide consignment and will pay their partners more rapidly. My feeling in our specific segment is that consumer/tech are doing their job but not like they did in the go-go days. Rather, they are growing and there are some very nice, growth opportunities.

Promote these markets:
1. Home security and automation
2. Entertainment
3. PDA/Mobile organizers and their attachments
4. Promote Web connectivity.
5. Promote wireless networks, notebooks
6. Sell services: In-home installations, upgrades

Promote these products:
1. XM satellite
2. Flat panel displays and great prices. This is an easy upgrade sale.
3. Digital music. Show consumers how easy it is to rip and burn.
4. Digital Photography. Show how easy it is to shoot, upload, enhance and forward.

Here are some more ideas:

Demo Dudes: Have people dedicated to walking around and showing consumers new things. Not "real demos" but elevators pitches to elicit interest and then walk them over to an area for a demo. 5 minutes max. Sales will rocket in that category. If you can't afford, invite Vendors to test in on high-traffic days.

Blowout/Closeout: Sell stuff for $1-10 or even free. Maybe its everyday, maybe its one day a week but have a "blowout day" that you promote. It's basically end of life product that is probably going to get touched twice before being destroyed. Mark it down. Who knows, you may make a few happy customers who will come back and upgrade. No matter what, you are taking cost out of the equation.

Get Savv-"e": Capture e-mail names! "If the brick and mortar guys are looking around for customers, they may be home online," said Peter Kastner, Chief Research Officer at Aberdeen Group, a market research firm based in Boston. He predicted that online sales would grow around 15 percent this holiday season compared to last, while sales at retail stores are only set to expand about 2 percent. What are you guys thinking not capturing customer information. Who they are, what they bought and e-mail address = x% off purchase. This is why a lot of the Web/direct marketing guys are beating the storefront guys. You should all have 1M customer e-mail names and with your demographic you should be selling e-mail marketing programs to customers. This will drive sales. I recently helped one Retailer with their program and the first campaign saw a 30 percent increase in the Vendor's product sales. Regardless of whether or not you buy, sell, trade names, it's an asset that has value. Customers can say no. It's your job to ask for it.

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.

On behalf of all the folks at ChannelMedia, I wish you a Happy Holidays and a fantastic 2003. Please keep us on your virtual newsstand.

NEWS

Channel Digest
By ChannelMedia Staff

Toshiba introduced the Pro6100 Series, the industry's first notebook PC with built-in dual Wi-Fi (802.11a/b) wireless connectivity, allowing users to experience the next level of high-speed wireless data access up to 54Mbps. With integrated Wi-Fi 802.11a, the Satellite Pro 6100 delivers faster wireless data transmission rates for high-end applications including video, voice and imaging. This high-speed data access enhances productivity by giving business customers faster access to large files such as graphics-intensive presentations. According to Cahners In-Stat, the adoption of wireless communication continues to grow, and there will be more than 55 million Wi-Fi networks in the United States by 2005. With dual wireless capabilities, the Satellite Pro 6100 Series enables users to access the Internet in an 802.11a or 802.11b environment, optimizing both flexibility and productivity.

"Toshiba continues to set a new standard for innovation with mobile products that meet the increased market demand for wireless connectivity," said Oscar Koenders, vice President of Product Marketing and worldwide product planning, Toshiba CSG. "Mobility and wireless connectivity are absolutely essential to our customers, and the Satellite Pro 6100 Series is a direct reflection of this need."

"The Toshiba Satellite Pro 6100 Series brings increased wireless performance and flexibility to mobile business users," said Rich Redelfs, President and CEO of Atheros Communications. "The higher speeds and additional channels available at 5GHz enable more scalable wireless networks for large or growing businesses. The Satellite Pro 6100 Series starts at $1,799 and is available through Toshiba's traditional distribution channels, VARs, www.shoptoshiba.com and mail-order partners.

Maxell announced the immediate availability of its Maxell-branded Linear Tape-Open(LTO) Ultrium 2 data cartridges in North America. With a native transfer rate of 20-40MB/sec and native capacity of 200 GB (40-80 MB/sec and 400 GB* compressed), Maxell Ultrium 2 is only the second generation of a migration path which extends to native capacities of 800GB. LTO Ultrium 2 technology is backward compatible with earlier generations, allowing end-users continued access to Ultrium 1 tape archives and providing investment security for years to come. The Maxell LTO Ultrium 2 data cartridge is capable of being used in all generation 2 Ultrium drives. Anticipated end-user pricing is expected to be $130 - $135. According to Rich Gadomski, Director of Marketing at Maxell Corporation of America, "Maxell is pleased to have completed qualification and to be ready to ship final production media so soon in the LTO 2 life cycle. We are confident that those looking to take full advantage of the advanced features of this next-generation technology will find Maxell¹s brand of data cartridges to be uncompromising in quality and performance."

Electronic Arts announced the release of its highly anticipated PC game, The Sims Online(TM). The Sims Online is the Internet, multi-player version of the top-selling PC game of all time, The Sims(TM). The Sims Online is a massive virtual world created and populated by thousands of players from around the world. In this never-ending alternative reality players can be themselves or "Be Somebody Else(TM)."

"This is one of the most entertaining, engaging and flat out fun games that EA has ever produced," said Don Mattrick, President Worldwide Studios for Electronic Arts. "I predict that a lot of people are going to skip work to play The Sims Online." In The Sims Online, players create and control the actions of a character known as a Sim. Players enter the world with a small amount of money to spend as they wish. They can purchase their own piece of land to do with as they please or they can join with other players to create shared homes and businesses or host wild events.

AdRem NetCrunch 2.2 is a solution for non-intrusive TCP/IP network monitoring, alerting and reporting. The main benefits of the program include improved uptime and reduced network monitoring tasks and maintenance costs across all critical platforms (NetWare, Windows, Linux).
Basing on the recent IT press coverage, there's been a trend among IT buyers away from big network management software. The reasons are:

• The slumping economy and the resulting need for quick ROI and low TCO
• Poor customer satisfaction - many of those who forked out $100,000 and more on huge NMSs never saw their money's worth
• Many top-end suites involve eons of implementation
• Many top-end suites offer far beyond what network managers really need
• Complexity of large management software means a small cadre of network managers grows into a whole department

The obvious alternatives to those high-priced management software packages are mid-tier, low-cost, out-of-the-box solutions like NetCrunch or What'sUp Gold (by IPSwitch). They are more focused and offer just what network administrators need, which includes:

• Visualization of network status and better understanding of network performance
• Detecting and preventing connectivity issues
• Detecting and preventing performance degradation
• Proactively analyzing trends
• Determining network's future capacity needs
• Extensive diagnosing capabilities

Given the above, I dare think there's a high probability that many ChannelMedia readers would find NetCrunch and the topic appealing. Please take a moment to look at the NetCrunch Webpage: http://www.adremsoft.com/netcrunch/index.php.

With the tremendous growth of the digital camera market, people are taking more digital pictures than ever before and there seems to be a reoccurring problem -- storage. Argus has the solution. A leading provider of quality digital, 35mm, Advanced Photo System (APS) and Power Zoom Cameras, they will be releasing the DC-1800 4-1, which includes a digital camera, a PC cam, a video camera and an internal USB port. The DC-1800 (see photo) is a full-featured digital camera boasting 16 megabytes of internal memory. Portability, convenience and versatility make the new Argus DC-15403-in-1 Digital Camera an essential tool for today's computer-savvy consumers. The DC-1540 can be used as a digital camera, a PC cam or a video camera and then be folded up to fit in a pocket or purse. Combine this with two megabytes of internal memory, the convenience of USB plug, and play compatibility and you get everything you need to send video or still images using your PC.

Many PC and Mac users want to use multiple USB and FireWire devices, but this can create a clutter of cables, power bricks and surge protectors among other issues. We'd like you to learn how JDI Technologies' GoldX PowerCore System helps make this and other USB/FireWire connectivity problems a thing of the past. Their GoldX line has attracted the attention of technology leaders like Hewlett-Packard and major Retailers. We would like to set up a time at CES on Thursday, Jan. 9th to meet and discuss the GoldX USB/FireWire products along with other solutions from JDI Technologies that can save users up to 75% on their long-term replacement costs. The new PowerCore System offers consumers a stackable solution to workstation clutter. The system allows you to expand the number of UBS/FireWire peripherals you have, connect multiple computers via local, LAN or broadband Internet connections and save outlet space used by power bricks within one solution. The GoldX PowerCore series also integrates the power supply for these modules within the base, providing both power and protection for your computer peripherals. If your computer power protection needs to be replaced, all you have to do is swap out the surge module - this will cost you substantially less then what you paid for the PowerCore System. JDI Technologies also has other products from cables to peripherals that are designed to allow the consumer to expand their connectivity choices for their notebook or desktop. The new universal USB/FireWire cord is another one-stop solution for the computer user on the go. Why carry around 5 cords in your computer case that you may never use? Just buy one cord and you will have an all-in-one solution to your USB/FireWire needs.

As the world's first audiophile wireless RF headphones to provide audio transmission at full CD quality, Amphony will unveil its 2.4 GHz Digital Wireless Headphones, Model 2000 at the 2003 Consumer Electronics Show which will complement Amphony's line of digital wireless headphones. "The Model 2000 combines the best of today's headphone technology with the best of digital wireless audio transmission technology which we have pioneered in our highly acclaimed Model 1000," said Gunter Fellbaum, Marketing Director at Amphony. "Our technology provides true CD quality wireless audio by employing digital audio transmission and by avoiding any audio compression and the inherent audio degradation and latency. By providing fully digital audio interfaces at the transmitter, we are able to eliminate any unnecessary analog-to-digital or digital-to-analog conversion and achieve unprecedented signal-to-noise ratio without any audio distortion whatsoever. Further, a noise shaping filter at the headphones removes any quantization noise from the audible frequency band. "By offering an extended frequency response compared to the Model 1000 and at a suggested retail price of $249, the Model 2000 will target the audiophile and audio professional who expect the same sound quality that corded audiophile headphones provide without wanting to be tied down to home or studio equipment. For more information, contact: Gunter Fellbaum, Director Marketing, Wireless Audio gfellbaum@amphony.com.

And when the going gets tough…. Kmart stays open! Announcing that last-minute shoppers can "Get More Gifts, Spread More Cheer" at Kmart stores nationwide when Kmart opens for 110 hours of non-stop shopping at 6 a.m. on Friday, Dec. 20 until 8 p.m. on Tuesday, Dec. 24*. Kmart and Kmart SuperCenters will be closed on Wednesday, Dec. 25 and will reopen at 6 a.m. on Thursday, Dec. 26.

"As the holiday approaches, saving time becomes even more important to our valued customers," said James B. Adamson, Chairman and CEO, Kmart Corporation. "Extended hours, coupled with amazing values help make the season a little brighter for those Kmart shoppers who haven't finished their holiday shopping." Special discounts Friday and Saturday throughout the store will give customers the chance to cross more names off their shopping lists, while saving money. Savings continue during the final three days of shopping starting on Sunday when specials sales extend to items for the home and for everyone in the family. For those who prefer to shop online, there is still time to order from kmart.com and receive the gifts by Christmas thanks to the kmart.com Holiday Delivery Guarantee. If an eligible product is ordered by 6 a.m. Eastern time on or before December 19 using third-day or overnight shipping, its arrival is guaranteed on or before Christmas day, or the item is free. Eligible items purchased before noon Eastern on December 23 using overnight shipping will also arrive on time. Eligible items and full details are available at www.kmart.com. Kmart Corporation is a mass merchandising company that serves America with more than 1,800 Kmart and Kmart SuperCenter retail outlets. In 2001, Kmart had sales of $36 billion.

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NEWS

Best Buy's Quarterly Results
By ChannelMedia Staff

Best Buy Co., Inc. (NYSE:BBY) today reported net earnings of $85 million, or 26 cents per diluted share, for the quarter ended Nov. 30, 2002, a 5-percent increase compared with $80 million, or 25 cents per diluted share, for the quarter ended Dec. 1, 2001.

"We are pleased to be able to report a 5-percent earnings increase in this challenging environment," said Best Buy Vice Chairman and CEO, Brad Anderson. "We applaud our employees for continuing to provide a superior in-store experience for our customers while driving the cost efficiencies that enabled us to improve our results."

As reported on Dec. 5, sales for the third quarter of fiscal 2003 increased 16 percent to $5.51 billion from $4.76 billion in the third quarter of fiscal 2002. The sales increase reflected the addition of 68 U.S. Best Buy stores in the preceding 12 months and the inclusion of a full quarter's worth of sales from Future Shop, which was acquired on Nov. 4, 2001. The Company's comparable store sales declined 0.4 percent in the quarter.

"November finished with a strong comparable store sales gain over the holiday weekend," Anderson said. "While comparable store sales declined modestly at the start of December, the strong finish in November and the gains at Future Shop give us confidence in our outlook of flat comparable store sales for the fourth quarter, despite the strong sales performance in last year's quarter."

The gross profit rate for the Company was 21.6 percent, unchanged from that of the third quarter of fiscal 2002. The gross profit percentage benefited from an increase in digital products as a percentage of the total sales mix to 23 percent, up from 17 percent in the year-ago period. In addition, the shift in sales mix to include more consumer electronics and fewer home office products boosted the gross profit percentage, as did sustained improvements in inventory shrinkage. However, the selling environment was significantly more promotional in the fiscal 2003 quarter, and the Company derived less of its sales from the higher-margin mall-based business. The inclusion of the international segment's results increased the gross profit percentage for the Company by 20 basis points.

"We were pleased to keep our gross profit percentage equal to last year's increased rate despite the more intense promotional environment and increased commoditization of our products," Anderson added. "Our success is due to our ability to shift our product mix toward higher-margin products and to increase the attachment rate of accessories."

The selling, general and administrative (SG&A) expense rate was 19.0 percent of sales for the third quarter of fiscal 2003, up slightly from 18.9 percent in the fiscal 2002 third quarter. The increase in the expense rate was driven by the inclusion of results from the international segment, offset by curtailed domestic spending on general and administrative expenses. The inclusion of the international segment's results for the full quarter raised the SG&A rate by 0.3 percent of sales.

"I'm proud of our success with managing expenses in the third quarter. Increasing the efficiency of our operations will be an important contributor to our future results as well," Anderson said.

The operating income rate declined to 2.5 percent of sales for the quarter. The Company reported net interest expense of $1 million for the 2003 quarter, compared to net interest income of $3 million for the 2002 period. Lower yields on cash investments and the issuance of convertible debentures caused the change. The Company's effective tax rate declined to 38.7 percent, compared with 39.1 percent in fiscal 2002, reflecting the Company's adoption of Statement of Accounting Standard (SFAS) No. 142, which eliminated the requirement to amortize nondeductible goodwill.

Darren Jackson, Executive Vice President Finance and CFO, said, "We expect modest growth in comparable store sales at Best Buy stores in the fourth quarter of this fiscal year, as well as a high-teens decline at Musicland stores. International comparable store sales will range from flat to up low single-digits. That would bring us to a total Company comparable store sales figure that is essentially equal to last year's fourth quarter, and up modestly for the fiscal year. In total, we continue to anticipate total sales of $22.8 billion, a 16-percent increase, for the fiscal year."

He continued, "Sales at this level are expected to result in earnings per diluted share of approximately $1.00 to $1.10 for the fourth quarter. The 5-cents-per-share drop from our previous guidance is primarily due to an expected operating loss of $80-85 million from our Musicland stores. This projection is very disappointing. Our focus during the holiday season will be on maximizing sales and profits at these stores. Concurrently, we are reassessing all of the Sam Goody mall locations based on the revised trends. Inevitably, a significant number of underperforming locations will need to be scrutinized. A more comprehensive review of the business alternatives is underway to determine the overall profit potential of the business as a whole. We will provide updates as work progresses.

"This guidance further anticipates that the gross profit rate will be 110 basis points lower in the fiscal 2003 fourth quarter than in the prior year's period, driven by heightened promotional activity and a lower contribution from our mall-based business. However, we expect that cuts in spending on outside services and corporate overhead will continue to gain traction in the fourth quarter. We anticipate that operating margins will decline by 80-120 basis points in the fourth quarter. For the fiscal year, we anticipate earnings per diluted share (excluding the cumulative effect of the change in accounting principle) of $1.67 to $1.77, compared with $1.77 in fiscal 2002. That full-year EPS estimate includes strong results from our core Best Buy stores, 0-2 cents of accretion from our international segment, as well as the Musicland operating loss. The Company's net loss in the first nine months of fiscal 2003 totaled $131 million, or 40 cents per diluted share, compared with net earnings of $220 million, or 68 cents per diluted share, for the first nine months of fiscal 2002. The principal cause of the earnings decline was a non-cash impairment charge of $348 million (after tax), which is equivalent to $1.07 per diluted share, related to the Company's adoption at the beginning of the fiscal year of SFAS No. 142, concerning the accounting for goodwill. This charge related to the write-off of goodwill associated with the Musicland and Magnolia Hi-Fi acquisitions. Earnings per diluted share before the accounting change totaled 67 cents for the first nine months, compared with 68 cents for the prior year's period.

As reported previously, total sales for the first nine months of fiscal 2003 increased 20 percent to $15.10 billion from $12.62 billion a year ago. The sales increase reflected the addition of 68 new Best Buy stores in the past 12 months as well as the acquisition of Future Shop. The Company's comparable store sales in the first nine months rose 2.2 percent.

The gross profit rate for the Company was 22.4 percent of sales for the first nine months of the fiscal year, or even compared with the rate for the first nine months of fiscal 2002. A 10-basis-point decline in the domestic gross profit percentage was offset by the inclusion of the international segment, which generated a higher gross margin rate.

The SG&A expense rate increased to 20.0 percent of sales, compared with 19.5 percent for the first nine months of fiscal 2003. The increase in the SG&A rate was driven by the deleveraging impact of modest comparable store sales gains and the inclusion of Future Shop's results. Compared with the pro forma SG&A rate from the first nine months of fiscal 2002, the SG&A rate increased by 0.3 percent of sales.

As a result of the increased SG&A rate, total operating income declined to 2.4 percent of sales for the first nine months of fiscal 2003.As reported, total sales at the Company's domestic stores (including Best Buy, Magnolia Hi-fi and Musicland stores) grew 10 percent during the third quarter to $5.08 billion, primarily due to contributions from new stores. The domestic segment's comparable store sales declined by 0.4 percent. Best Buy comparable store sales increased by 0.7 percent, while Musicland comparable store sales declined by 11.5 percent. Magnolia Hi-fi comparable store sales increased by the low single digits.

The gross profit percentage at the domestic stores declined for the third quarter, despite a more profitable mix of business at Best Buy stores. The primary factors were the more promotional environment, changes in product mix at Musicland stores and the reduced contribution from higher-margin sales at Musicland mall-based stores. The third-quarter SG&A rate for domestic stores declined to 18.6 percent of sales from 18.8 percent, principally reflecting cuts in general and administrative expenses. The domestic operating margin was 2.8 percent of sales in the quarter, even with that of the prior year. Future Shop stores comparable store sales in the third quarter, as reported, rose 3.8 percent due to strong sales of consumer electronics (particularly televisions and digital cameras), DVDs and notebook computers. Total sales in the international segment, compared with pro forma results, rose 20 percent to $424 million. International sales reflect the addition of nine Future Shop stores in the past 12 months and the opening of eight Best Buy Canada stores. The gross profit percentage increased by 100 basis points, reflecting a more profitable mix of products, including more digital products and strong increases in consumer electronics. The SG&A expense rate increased to 24.0 percent of sales as a result of investments associated with the launch of Best Buy stores in Canada and to improve the future profitability of Future Shop. The Company remains confident that it will be able to lift the international segment's operating margins to Best Buy store levels over the long term. The international segment reduced the Company's third-quarter earnings by 1 cent per diluted share in the third quarter.

"The launch of Best Buy stores in Toronto was a huge success," said Kevin Layden, President of Best Buy Canada Ltd. "In addition, despite the added competition, our Toronto Future Shop stores generally had higher comparable store sales gains than stores in our other markets."

SELLING AT RETAIL

Point of Contact Marketing: Our Top 10 Lessons
By Beverly Ham and Mark Dean, BDS Marketing

Chapter 7 from "The BDS Guide to Point of Contact Marketing"

Over the past few months, we have shared our thoughts on the concept and practice of Point of Contact (POC) Marketing, a sales and marketing discipline that is being successfully employed by a wide range of technology and consumer electronics companies. We thought it might be helpful to wrap up our series with a list of the Top 10 Lessons we have learned while developing and implementing POC Marketing programs. We welcome you to contact us if you have any questions or would like to add your own suggestions to our list.

Beverly Ham is chairman and CEO and Mark Dean is founder and president of BDS Marketing of BDS Marketing, one of the nation's leading sales and marketing service firms. Established 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 Beverly at (949) 472-6700, ext. 1231, or Beverly@bdsmarketing.com. Contact Mark at (949) 472-6700, ext. 1232, or mark.dean@bdsmarketing.com.

This article is the seventh 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
Article 5: A Sales Spike is Not Enough: Gaining Maximum Impact from Promotional Marketing
Article 6: Enhancing Retailer Relationships Through Point of Contact Marketing

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Looking to reach the top decision makers in the Retail Channel. There is only one place you can stay top of mind: ChannelMedia.

See the opportunities at www.channel-media.com/mediakit.

RESEARCH

Retail Kiosks Must Balance Service and Sales
By Gale Daikoku, Gartner

Question

What role should kiosks play in enhancing customer relationships and increasing sales?

Answer

Kiosks should provide better in-store service, but must also drive sales. However, if a kiosk is not tied directly to some transaction activity, producing an acceptable return on investment will be challenging.

For years, self-serve kiosks have provided customers with in-store services such as wedding registries and special-order capabilities. Kiosks are designed for several types of self-service interactions via a range of hardware such as keyboards, monitors or touchscreens.

Though many kiosk deployments focus on enhancing in-store services, retailers are discovering that the services must lead customers to a sale. If the effectiveness of a kiosk cannot be measured by the sales it drives, reconsider the services offered.

To create a favorable kiosk business case, balance the transactional and service roles of kiosks. Implement a primary service that drives transactions as a first priority and then other service-enhancing applications can be added to the same kiosk.

For example, a kiosk can display a gift registry application that is updated by sales information and supplemented with product information and a store map.applications that do not have direct sales impact, but are value-added and can help sales.

Kiosks are used in several different ways. Use this list as a guide to choosing the right mix of applications:

• ATM-like capabilities: 7-Eleven is testing its proprietary Vcom system in nearly 100 US stores. The kiosk accepts cash and offers check-cashing and money orders.
  
  
• Never lose the sale: Retailers such as REI use kiosks as an interactive tool to close customer transactions in retail stores. Customers or sales associates can place special orders for items not available in-store.
  
  
• Gift registries: Many department stores, specialty and general merchandise retailers are using kiosks to print out or update customer lists for wedding and baby registries.
  
  
• Human resource applications: Kiosks are used as a pre-employment screening tool to capture and allow store management to act on job applications more efficiently.
  
  
• Product features and customization: Customers can use kiosks to explore and customize features and functionality of products such as computers, consumer electronics or home furnishing items.
  
  
• Extending your store beyond the four walls: Retailers such as Virgin Records are transforming kiosks beyond music listening stations to allow customers to view and purchase items not available in their stores. Borders and Barnes & Noble are testing Web-connected kiosks to allow customers to search and place orders for products.
  
  
• Supplementing your labor force: A bank in Germany is using kiosk stations to supplement its tellers. The kiosk interface is much like the online home-banking site, but the customer completes the transaction in the bank branch rather than at home or work.

The Internet has enhanced the usability of kiosks. Kiosks provide the greatest benefits to retailers that leverage existing corporate applications, and integrate features such as real-time inventory availability or account/order status. In fact, tying kiosks to an existing Web interface helps provide a seamless, multichannel experience for your customer.

RESEARCH

Using The Feature Neutralization Tool to Negotiate the Purchase of PCs
By Alexia El Wardani, Marketing Manager, ARS

Procurement professionals within the Notebook PC industry have much to quandary when making large volume purchases for their organizations. As dozens of manufacturers offer literally tens of thousands of different notebook configurations at tens of thousands of different price points, it is nearly impossible to ensure the purchase of the optimal notebook at the optimal price…unless, of course, you are privy to the practice of feature neutralization.

Feature Neutralization (FN), by its simplest definition, is the process of identifying the true market value of a product, calculated by the sum of its parts. To arrive at a product's FN, the product is first broken down into an itemized list of components. Then, once identified, each component is assigned a cost, and all individual costs are added together to arrive at that product's total neutralized price. Finally, after a product's neutralized price is uncovered, procurement professionals have the ability to identify if a product's price in the direct and retail channels is above, at, or below its true market value.

Using FN to Assess a Product's True Market Value in Relation to Its Channel Pricing

Take, for example, the Compaq EVO N610c 470037-757. This 2 spindle corporate, commercial thin and light notebook comes with a P4-M processor, 256 Megabytes of RAM, a 14.1 inch screen, and DVD/CD-RW, among other features. Currently, Compaq is selling this notebook direct for approximately $1,999. Yet with upwards of 40 feature specifications, deciphering if this product is over priced, under priced or right on the mark can be an overwhelming task. However, applying the basic feature neutralization model more simply brings this answer to light:

1. First the product is broken down into its individual components.

2. Then, each component is assigned a neutralized price.

Specifications
Values
Neutralized Prices

Processor
P4-M 2000
$1,036

RAM
256
$80

Display
14.1" TFT
$189

Hard Disk Drive
40
$250

Modem
56
$35

ODD
DVD/CD-RW
$250

VRAM
32
$80

*Only subset of values. Neutralized values are calculated via ARS'proprietary Neutralization methodologies.

3. Finally, the individual prices are summed, uncovering the product's true, assembled value.

Direct Channel Price
$1,999

Neutralized Price
$2,537

Value Difference
-21%

4. From here, it can be determined if the product is under priced, over priced, or right on the mark in relation to the market today. As shown above, this EVO is priced at 21% below its true market value.

So why is it so underpriced in the channel compared to its neutralized value? There are a few reasons why a product may be selling under (and in this case a great deal under) its neutralized value. For example, a manufacturer may be clearing inventory to make way for newer models or aggressively trying to gain market share. In this case, according to ARS Notebook PC Analyst Matt Sargent, the latter is more the truth. Compaq and Dell have been in a great battle vying for market share within the commercial thin and light notebook industry, resulting in a number of promotions and price drops dating back to around the beginning of July when the products first hit the market. But what ever the reason, a product priced at 21% below its true market value is a product at a great price. If you are in the market for a commercial thin and light and the Compaq Evo N610c 470037-757 meets your needs, then now may be the time to buy.

RESEARCH

Comcast: The New AOL
By Mark Kersey, ARS Broadband & Cable Industry Analyst

With its acquisition of AT&T's cable systems now complete, Comcast finds itself firmly atop the broadband and cable industries. Not since the beginning of 2000, has one company owned more broadband Internet market share than what Comcast currently controls - fully 19.6% of all US broadband subscribers are customers of the Philadelphia-based cable giant, compared to then-AT&T Broadband's 20.7% share at the end of the first quarter of 2000 - which is all the more remarkable when considering that today's broadband market is more than six times larger than that of nearly three years ago. In the cable video industry, Comcast's dominance is even more striking, with a network passing nearly 40% of all the homes in the US and boasting almost 22 million cable television subscribers. That Comcast was able to assemble such a colossus without any significant governmental or regulatory conditions is certainly reflective of a far less regulatory-minded federal government than was in place a few years ago and is perhaps CEO Brian Roberts' single greatest achievement. The question, however, is: what will Comcast do with so much power accumulated so quickly?

Comcast, in short, has become the new AOL. It is the de facto broadband and cable industry leader, the one company around which any equipment Vendor, content supplier or advertiser must build and develop their products and services if they hope to meet with any success. It has become the proverbial 800-pound gorilla, a moniker that until very recently was practically trademarked by AOL. Nowhere was this more evident than at the recent Broadband Plus tradeshow (formerly known as the Western Cable Show) in Anaheim, in which a Comcast executive was on nearly every conference panel and Brian Roberts' keynote interview with CNBC anchor Bill Griffeth drew a standing-room only crowd that filled an entire ballroom of the Anaheim Convention Center. With the attendees hanging onto nearly every word Roberts uttered, one got the sense that the cable industry has experienced a changing of the guard that has ushered in an era in which cable guys are running the show once again. When AT&T's Mike Armstrong spent billions in 1998-1999 to acquire cable giants TCI and Media One, thereby creating the nation's largest cable company, Armstrong - as a phone guy and an outsider - never had the clout to lead the cable industry as a whole. AT&T Broadband's reputation for poor service and slow network upgrades only reinforced Armstrong's perception problems in the cable business. At the Western Show, you could practically hear the sighs of relief from the attendees: The cable guys are in charge again.

So if Comcast is the new AOL, what has become of the old AOL? At last glance, the ISP giant still has 35 million customers worldwide, more than 26 million of which are in the US, but there is little doubt that 2002 has been The Year to Kick AOL While It's Down. From suggestions that AOL Time Warner change its name to Time Warner AOL (or drop the "AOL" entirely) to constantly shifting strategies to make more significant inroads into broadband, this has been a year of undisputed change within the world's largest ISP. Gone are former CEO Barry Schuler, his successor Bob Pittman, Broadband Division President Audrey Weil and a host of Pittman lieutenants who were viewed as too focused on driving advertising revenues at the expense of subscriber services. At the helm now is Jon Miller, a former executive with Barry Diller's USA Interactive, who faces the somewhat unenviable and undeniably challenging task of trying to right the AOL ship. First among his priorities has been in developing a real broadband strategy, which is absolutely essential to the company's future growth prospects. While AOL does have somewhere around 650,000 broadband customers, they represent just over two percent of the company's total US subscriber base - by far the lowest percentage in the industry. Miller's plan, as unveiled to Wall Street analysts and investors last week, is to focus on the company's relatively popular but fairly unheralded Bring Your Own Access (BYOA) program, in which customers pay $14.95 per month for the content components of the AOL service while subscribing to another provider's broadband access. The idea is to layer the AOL content on top of a cable subscriber's basic access in the manner of a premium service such as HBO. It's notable that AOL will focus its efforts on cable rather than DSL going forward due primarily to the fact that many of the DSL network operators are already in bed with AOL's content/portal rivals (MSN has deals with Verizon and Qwest while Yahoo! has teamed with SBC).

The newest shift in AOL's corporate strategy reflects an overdue realization by AOL's top management that its dial-up business is largely stagnating while its broadband service is not growing nearly as quickly as they would like, primarily due to the higher than average costs AOL is forced to charge its customers to make AOL Broadband even marginally profitable (AOL leases wholesale cable and DSL lines from the four Bell phone companies in addition to DSL wholesaler Covad and cable providers Time Warner Cable and Comcast). Unwilling to forsake profitability in exchange for market share, AOL is trying a different route in emphasizing BYOA. Some on Wall Street had expected that emphasis to include a reduction in the monthly cost of AOL BYOA, but CEO Miller told analysts and investors that his team did not see a reason to cut the cost down to $10 per month (which is what MSN charges for a similar service) given the success AOL has had with the current BYOA price point (AOL has somewhere between one and two million such customers).

Ultimately, many on Wall Street believe that the shift in strategy is too little, too late. Several securities firms released reports following the AOL presentation, many of which reflected the same theme: the strategy isn't necessarily bad, but it may come too late to really provide AOL with the boost it is hoping for. Indeed, the mere existence of the BYOA service is an acknowledgment that AOL Broadband is not performing up to the level one would expect of the world's largest ISP. Ultimately, ARS believes that nationwide broadband penetration is still low enough that there is time for AOL to catch up with the incumbent cable and phone providers. However, we believe that a more fundamental shift than what was presented this week will be required for such an event to actually occur. The real problem for the national ISPs is that broadband resale is an inherently unprofitable and unsustainable business model. Until that conundrum is solved, all three of the major national ISPs (AOL, MSN and EarthLink) will struggle with developing profitable broadband strategies. If an AOL acquisition of a true nationwide broadband network - such as those operated by Covad or New Edge Networks - was not on the table during the recent strategy meetings, ARS believes that such an idea should have received serious consideration. However, AOL's strategy shift as laid out last week forces us to believe that AOL for all intents and purposes has largely abandoned the notion of becoming a broadband service provider to rival the incumbent cable and phone companies and will instead become an online version of a premium movie channel. Such a strategy is not lacking in substantial risk - namely that the bulk of its lucrative dial-up customers will leave the AOL "walled garden" for a competing provider's broadband service and will decline to shell out an additional $15 per month for the AOL content - but it is apparently the only card AOL's executives felt they had left to play.

The chain of events has thus come full circle. Comcast has become the old AOL while the new AOL has in a sense become the old Comcast: a strong player in the market but one that does not outright dominate its industry. AOL no longer possesses the power to muscle around suppliers and competitors at will, as its rather unfavorable wholesale contract terms with Comcast indicate (AOL will pay Comcast roughly $38 per line sold, as compared to the sub-$30 rate it and EarthLink each pay Time Warner Cable for a similar wholesale arrangement). Ultimately, if its metamorphosis from the nation's largest access provider (albeit of pokey dial-up connections) to a leading provider of premium content services is not successful, AOL executives, employees and investors will only be left to reminisce about glory days gone by, when the old AOL was as much of a powerhouse and industry titan as the new Comcast now finds itself.

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COMMUNITY

Changing Channels: Am I a sick puppy, or what?
By Steve Cross

Comdex was in Las Vegas a few weeks ago, and I loved it. Even thought it was smaller than usual, it was still great fun. There were some old friends to chat up, and some new products to check out. That's why I'm in this business. It's exciting. There's always something new.

Just after the New Year, CES is scheduled for Jan 9-12 in Las Vegas. MacWorld is in San Francisco the week prior. I will attend both: Macworld to see old friends from the Mac market where I spent a couple really good years, and CES to see all the great stuff people will be talking about for the next year. I never complain about trade shows anymore. Here's why:

Attended various trade shows as part of my job for years. Mostly complained about it all the time...travel, overpriced hotel rooms, taxi lines, shaking hands with all those strangers, etc. Then went to work for SGI (formerly Silicon Graphics) for a couple years and they didn't send anybody in my channels group to trade shows. While at SGI, I missed two Comdexes, the only ones I've missed since 1982. There are old industry acquaintances I only see at shows. Not close friends, just folks I've been running into for 20 years or so. Nice people. Interesting people. And I didn't see them at all those years. After leaving SGI, I went on to another company that insisted I attend trade shows...and I couldn't have been happier.

Now every year I attend Comdex, CES, CeBit, RetailVision, VARVision, and a couple other shows. Still love them all, even CeBit in Hannover. Heck of a big show...9 days long, 650,000 Europeans. Not enough hotel rooms in Hannover, so you have to stay with German families in their homes. Must confess, I do like CeBit. One sick puppy, huh?

Best of holidays to everyone. See you all at CES (or MacWorld, CeBit, or maybe RetailVision)!

Steve Cross consults on channel issues. Read an archive of his articles and a free excerpt from his new book at http://www.crosschannel.com. Contact: steve@crosschannel.com, 702-492-7472.