Circuit City gives up commission sales and eliminates 2,000 jobs. And "Nobody wants the Wiz" (a headline I stole from one of the New York newspaper citing the long overdue announcement) is closing, er, hoping to sell off its chain of 17 stores. Well, a lot of conjecture will point to the fact that the market has been "over-stored" and the Vendors of technology-related products are over-distributed. On a macro level, we are in the worst recession in a long time. Add to that the threat of war and the outlook is not exactly rosy. So everyone is battin' down the hatches.

Ah, what to do, what to do? Well, how 'bout for starters everyone get serious about creating a "demand channel" (or chain) and not considering themselves a distributor of select goods. For too long we were just supplying product and sticking a price tag on it. Today, that's far from the case. There's just too much product chasing too few dollars. In other words, everyone needs to get real about driving some excitement into their stores, selling value-priced goods and creating superior customer service that goes beyond the store (delivery, installation and home integration services).

It's also a good time to think about your channel relationships. There is something missing. You know what it is? How about a real strategy! Let's start by figuring out how to maximize each partner to their fullest and shedding those partners who are not meeting your standards. What has been missing is real business planning that starts when the Vendor first considers how they want to launch their front line goods into the market and then lays out a plan with their partner to figure out how to build a strong value proposition to both their partner and customer.

The market today is going Darwinian on us all. The "Vendor-Retailer" partnership has to come together as one to create a compelling value proposition that compels the customer to purchase. Anything less will most likely be road kill.

Letter to the Editor

I found your article in the most recent Channel Media eblast to be very interesting. I completely agree with sections # 6 and # 7. For a long time, Retailers have really pushed Vendors hard for MDF, aggressive promotions, SRP price cuts, consignment deals, as well as compliance on box size and design - especially in the software arena. Every Retailer is different, so many times there is no consistent "channel policy," which leaves Vendors trying to unrealistically please all Retailers, sometimes at the expense of good business decisions. Many software Vendors have gone out of business or were bought out over the past couple of years, in large part, because they have bent over backwards to stay on the shelves in retail - even at the cost of profitability. And though Retailers have eased up a bit on their demands in the past year, many really haven't done enough to increase foot traffic in their own stores. Retailers seem to be very dependent on Vendor promotions and Vendor price slashing to bring in customers. Most Vendors would prefer not to drop their retail prices, but in order to stay on the shelves, they feel they must comply with a Retailer's request. Your assessment is correct when you say that Retailers who don't look beyond Vendor supported ads and promotions to drive traffic, will find themselves out of business. The Retail model is constantly changing, as is true of most things in this industry. Some of the same things happening in the retail channel now (product price wars) remind me of the pricing wars between Merisel, Ingram and Tech Data in the early 90's...before the distribution channel was completely degraded. Some distributors are now trying to hang onto their businesses and regain lost (or given away) profit. In order to make up for the decimated margins that distributors created a while back, they have tried without enormous success to re-work their business plans. Merisel is now involved in software licensing, both Ingram and Merisel sold off or closed parts of their businesses, lay offs and program cuts are constant and Ingram even developed a plan in the past year to have Vendors selling to retail stores, pay a high per unit fee to make up for the margin they are trying to regain. Once again, the Vendors pay the price of competitive price cutting created by larger channel businesses...but I digress. I hope the Retail channel learns from the mistakes of distribution before they find themselves with fewer customers, fewer Vendors and no way back from extreme price cutting. Taking steps to boost traffic and sales through things other than Vendor driven promotions and price cuts is a good start. You mentioned that Retailers must be proactive to create business and I agree. I imagine the "Best Buy Funzone" that you discussed in your article would be part of this type of strategy. However, I'm curious to know who else is moving that way? I'm interested, because as a Vendor, those are the stores I am more inclined to focus on and work with as a true partner.

- Thanks again for the interesting article. Regards, Kris Woods

Keith Newman is the Editor and Publisher of ChannelMedia. This newsletter is free, courtesy of Gartner and Vision Events. We are always encouraging the community to share its comments and opinions. If you are interested in contributing or sponsoring an article, please contact me at kanewman@sbcglobal.net.

NEWS

RetailVision® Spring 2003:
Major Enhancements Planned for RetailVision Next Month in Chicago!
March 25-28, Sheraton Chicago Hotel and Towers, Chicago, Illinois
By Pete Prentice, Event Director, RetailVision

Every major technology event holds up a mirror and reflects the constant innovation of the industry that it serves. That's certainly the case with RetailVision Spring 2003, where emerging and leading technology Vendors will gather in Chicago this March to present the newest products, services and programs for the consumer channel.

But this Spring's RetailVision will do more than just reflect marketplace changes. The Event will also unveil many exciting improvements and additions to the three-day program itself. After all, our "product" is no different than any other successful product in the retail channel. It needs to be constantly updated and refreshed to better serve the needs of our customers.

Many of the changes are based upon ongoing conversations with the Vendors, Retailers and other attendees who collectively make RetailVision the unique Event that it is. RetailVision Spring 2003 will roll out a number of new features that we believe will enhance the business and social experience of every participant.

New way to choose entertainment
We took a new approach to the selection process and allowed the channel to vote on their entertainment of choice. The winner: a "Saturday Night Live Reunion" with Kevin Nealon, Jon Lovitz and Victoria Jackson. Vendors and Retailers will be treated to a comedy extravaganza, which will be followed by the "Best of RetailVision Awards"ä presented by the three renowned comedians.

New business-friendly site for Welcome Reception
The RetailVision Welcome Reception will now be held in The Meeting Place™. This will give everyone a preview of The Meeting Place, and offer more opportunities for networking, impromptu meetings, and the opportunity to schedule meetings for later in the Event.

Expanded access to The Message Center
Based on the success of the Internet/message center located in The Meeting Place at the last Event, we are doing it again this Spring. The Message Center will feature even more workstations available for attendees to use, and will once again facilitate communications between Vendors and Retailers as well as providing an easy and convenient connection to e-mail and general Internet use. AOL will be sponsoring this service for all attendees.

Microsoft Breakfast Premiere
Microsoft will be hosting the opening Retailer breakfast on Tuesday morning, using the opportunity to launch their latest products and platforms to the retail channel. Microsoft's new consumer products are always headline-making, and this breakfast gives RetailVision attendees a sneak preview. Another must-attend feature.

New Round Table Industry Forum
RetailVision is teaming up with Campaigners to offer Vendors a round table industry forum to discuss the latest and greatest industry topics. Adding to the already impressive range of rich content at the Event, these round table sessions will give Vendors a peer-to-peer forum to exchange ideas and gain a deeper understanding of the challenges and opportunities ahead.

More of the Industry's Most Powerful Retailers
The list of leading Retailers for the Spring Event is growing every day. We're anticipating one of our largest and most high-level audiences ever. Vendors will be able to review the list of Retailers well in advance of the Event in order to set up on-site appointments and target their best prospects. Of course, the one thing that never changes at RetailVision is a total focus on facilitating business partnerships between Vendors and top 100-level Retailers. Vendors will be able to maximize their time and ROI through Private Boardroom Appointments, Prescheduled One-on-Ones and other proven and powerful face-to-face platforms. Best of all, there's still time for your company to benefit from the invitation-only audience of leading Retailers, the unique business-intensive agenda, and the exciting changes happening at RetailVision Spring 2003.

To discuss your participation this March 25-28 in Chicago, contact:
Melissa Park at 603-471-4226 or melissa.park@gartner.com;
John Hurley at 603-471-4228 or john.hurley@gartner.com
or visit www.retailvision.com.

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NEWS

Q&A with Bob Culliton
National Sales Manager, Microsoft Corp.
bobc@microsoft.com

At the upcoming RetailVision® in Chicago, Microsoft will sponsor a kick off breakfast for Retailers as well as host a variety of meetings with strategic partners, Retailers and potential new partners. In those meetings Microsoft plans to focus on exciting new products, major upgrades, aggressive new marketing programs that directly support Retailers and a bit of new philosophy. The challenge, Microsoft believes, it that the well is running dry. Consumers are less and less interested in upgrading to the latest and greatest PC speeds and feeds. In fact, Culliton quoted a figure suggesting that the upgrade cycle has slowed to an all time low. We recently sat down with Culliton and got a brief overview of his plans and topics for Microsoft and his retail partners.

Q. Bob, you got a lot on your plate…Where's the focus now at Microsoft and the Retail Group?

A. We are looking to help change how products are sold at retail. We are planning our promotional calendar and taking a new look at business opportunities. We are going to engage more broadly with current and new retail partners and we think there are some opportunities with non-traditional Retailers where we can help them (in a stagnant economy) achieve their business objectives by finding find new areas of growth. For example, we've initiated discussions with Retailers who do photo processing, like drug stores, where we can promote with them the benefits of film processing and how to get the photos digitized on disk. We also think there is some room in the entertainment space, pairing up our game software with some of their marketing efforts.

By the way, I also should mention that Microsoft has created a new Web site for its partners (called "Retail Partner") that aims to keep partners informed about new products and programs and ways we can support their marketing activity. We also have dedicated people to help retail partners understand our products, programs and how they can better leverage Microsoft to meet their objectives.

Q. What products will you be talking about at RetailVision?

A. We are continuing to add products to entertainment portfolio this spring. Freelancer is a new title. It's a space based role playing game. And we have Rise of Nations - strategy game based on Civilization. Then this summer we have several of our perennial favorite products that will be rev'd including; Money, Encarta, Streets and Trips. Then we have hardware products. One area is the Input space. From a vision and product direction we are placing a lot more emphasis on consumer choice and personalization. Along those lines we will be bringing out mice and keyboard products that will allow customers to customize their desktop. In addition to offering features and functionality, we are also aiming at more aggressive price points.

Q. Wow, that's a lot. It also reminds me that you have networking products. How are those doing?

A. Yes, Microsoft entered the networking category this past fall and we are very happy with the early results and are continuing to build around wireless networking with a full complement of 802.11 G-based products. We want to clearly identify the consumer value prop with G-based products. We firmly believe the consumer going forward will not buy network products on speed and feeds. Microsoft will show leadership in communication benefits supported by a focus on ease of use, maintenance and integration with the desktop OS.

Q. Now about this "change of philosophy" we've been talking around. Where does Microsoft stand relative to the consumer/retail upgrade cycle and the need to drive more demand generation activities?

A. Right. First let me offer some background. We feel that the PC ecosystem is not healthy and primarily based on our historical focus of focusing on what it is vs. what it can do for consumers (e.g. specs, speeds and feeds vs. value it brings to the user). And we are initiating work with the retail community to move towards a solutions-based scenario marketing and merchandising…this approach becomes more important as we go forward as we have high degrees of digital convergence. We are going out to our partners and educating them based on our research and knowledge and supporting them to help make this transition. We need to change the way we talk to consumers or we won't have consumers to talk to. Everything will be a commodity. We will have elongated repurchase cycles and only the most efficient Retailers will win.

Q. That's not a pretty picture.

A. Right. Right now….home consumers are on a 5-6 repurchase cycle - that's the longest it has ever been. We have to work with the retail channel to look past short-term goals and we are hopefully doing our part by helping fund the remerchandising effort to make this a reality.

This sounds great Bob. I look forward to hearing more in Chicago!

NEWS

Growth in the E-commerce Market - Understanding the Hype
By: Jennifer Gerlach, ARS Channels Competitive Industry Analyst

Over the past three years, the growth, integration, and sophistication of information technology and communications have begun to change our society and economy. Consumers are now using computer networks to identify sellers, evaluate products and services, compare prices, and exert market leverage. Businesses are using networks even more extensively to conduct and re-engineer production processes, streamline procurement processes, reach new customers, and manage internal operations. As expected, the Retailers known as brick and mortar stores are one of the channel's most affected by this change in consumers. This holiday season, Retailers are reporting dismal numbers and analysts are pegging the season as one of the worst in years. Chains that normally would show a great increase in sales, such as Wal-Mart and Target, all reported weak sales coming off the Christmas rush. But, this is not the case for the e-commerce players such as Overstock.com, eBags and Amazon.com, who showed great growth in the holiday season. This piece will discuss the emergence and hype that has occurred in e-commerce over the course of the past three years.

The 2002 holiday season is a good representation of consumers' shift from solely purchasing from the retail channel to partially making their purchases with the e-commerce channel. As portrayed in the graph above, e-commerce sales increased 78 percent year on year to $14.6 billion in Q4 2002, up from $11.176 billion in Q4 2001. As you will notice, the largest growth for the e-commerce channel still occurs during the 4th Quarter holiday season, though 2002 marks a new trend of substantial growth in all quarters throughout the year versus that of 2001's stagnant growth in the first three quarters. ARS has found that online promotions such as free shipping and internet only sales has been the largest push for this shift in e-commerce sales.

Companies such as Overstock.com, eBags, and Amazon.com led the e-commerce growth. Overstock.com reported sales of $25.2 million between November 29 and December 25, up from $9.5 million in the year-ago period. eBags reported that holiday sales increased 101 percent from a year ago, and Amazon.com reported that consumers ordered 56 million items worldwide from November 1 to December 23, 2002 up from 37.9 million holiday orders during the same time last year. Amazon also announced that the fourth quarter 2002 was the first profitable quarter in the past five quarters.

The Hype

While there has been a great deal of hype surrounding retail e-commerce, e-commerce sales are still a relatively small part of overall retail trade sales. The table below shows a comparison of total retail sales and total e-commerce sales. These numbers are provided in a quarterly view by ARS. Looking at the numbers side by side you can see that e-commerce sales for the past three years account for less then 2 percent of total retail sales quarter on quarter. While e-commerce sales have made great strides over the course of the past three years, the reality still remains that e-commerce makes up very little of the total consumer spending.

Conclusion
In conclusion, e-commerce sales have not and will not surpass retail "brick-and-mortar" sales anytime soon. But e-commerce is growing quite rapidly and, if "brick-and-mortar" stores want to continue to grow, they will consider implementing stronger "click-and-mortar" strategies to offset the current decline in retail sales.

NEWS

Retail Digest

Cablevision Systems Corp. said it will exit the consumer-electronics business by the end of the second quarter, just six months after announcing a turnaround plan for its chain of WIZ stores. The Bethpage, N.Y. company said it is exploring options for its 17 remaining WIZ stores, including selling the business or closing it. Under a turnaround plan announced in August, the company closed 26 unprofitable stores in the third quarter of 2002. But after evaluating the remaining locations, Cablevision said Monday that operating the stores "is no longer a viable option." It cited the weak retail economy. Cablevision is the No. 6 U.S. cable company, with about three million customers. Its other properties include Madison Square Garden, Radio City Music Hall and the New York Knicks and Rangers sports franchises.

Amazon.com's highlights for the quarter;

1. Worldwide unit growth was 34% for 2002.
2. Third-party seller transactions (new, used and refurbished items sold on Amazon.com product detail pages by businesses and individuals) grew to 21% of worldwide units in the fourth quarter, compared with 16% of units a year ago.
3. Inventory turns improved 22% to 19 for 2002, up from 16.
4. Electronics, Tools and Kitchen segment sales grew 21% to $262 million in the fourth quarter and pro forma operating loss declined 52% to $10 million.
5. Books, Music and DVD/Video segment sales grew 13% to $606 million in the fourth quarter and pro forma operating profit grew 14% to $73 million.

Overall, Amazon said that net sales were a record $1.429 billion in the fourth quarter, compared with $1.115 billion in the fourth quarter 2001, an increase of 28%. Net sales grew 26% to a record $3.933 billion for fiscal 2002, compared with $3.122 billion for 2001. Operating income was $71 million in the fourth quarter, or 5% of net sales, compared with $15 million in the fourth quarter 2001. Operating income for fiscal 2002 improved to $64 million, or 2% of net sales, compared with a 2001 operating loss of $412 million. Pro forma operating profit in the fourth quarter grew 74% to $102 million, or 7% of net sales, compared with a fourth quarter 2001 pro forma operating profit of $59 million. Pro forma operating profit for fiscal 2002 was $180 million, or 5% of net sales, an improvement of $225 million compared with 2001. Net income was $3 million, or $0.01 per share, in the fourth quarter, compared with $5 million in the fourth quarter 2001, or $0.01 per share. Net loss for fiscal 2002 was $149 million, or $0.39 per share, compared with $567 million, or $1.56 per share, in 2001. Pro forma net profit in the fourth quarter, which includes interest expense, grew over $40 million to $75 million, or $0.19 per share, compared with $35 million, or $0.09 per share, in the fourth quarter 2001. Pro forma net profit for fiscal 2002 improved over $223 million to $66 million, or $0.17 per share, compared with a 2001 pro forma net loss of $157 million, or $0.43 per share. (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.)

"On top of the five price cuts we've made over the past 18 months, we're announcing today that we've decided to make Free Super Saver Shipping on orders over $25 a full-time, year-round offer," said Jeff Bezos, Amazon.com founder and CEO. "We're at a tipping point. Customers are now shopping at Amazon.com as much for our lower prices as for our selection and convenience."

PC Connection reported net sales for the three months ended December 31, 2002 increased by $48.6 million, or 18%, to $322.2 million from $273.6 million for the three months ended December 31, 2001. Net income for the quarter was $2.9 million, or $.12 per share, compared to $1.4 million, or $0.06 per share for the three months ended December 31, 2001. Net sales for the year ended December 31, 2002 were $1.19 billion, compared to $1.19 billion for the corresponding period a year ago. Net income for the year ended December 31, 2002 was $3.2 million, or $.13 per share, compared to net income of $7.4 million, or $.30 per share for the corresponding period a year ago. Excluding MoreDirect, Inc., the Company's most recent acquisition, net sales for the quarter were $252 million, compared to $273.6 million for the three months ended December 31, 2001. Earnings per share for the quarter, excluding the MoreDirect operations, were $.02 per share compared to $.06 per share for the same period a year ago. MoreDirect's sales for the fourth quarter were $69.9 million, flat with the third quarter, but up 38% on a pro forma basis from the prior year's fourth quarter. MoreDirect was acquired by PC Connection, Inc. in April 2002.

Patricia Gallup, Chief Executive Officer of PC Connection, Inc., said, "Our fourth quarter results were stronger than we expected given the current economic environment. Excluding the operations of MoreDirect, net sales for the month of December grew by 5% over a year ago. Our positive finish in 2002 has encouraged us to be cautiously optimistic that, increasingly, there will be renewed demand in 2003 for the products and services PC Connection provides."

Ken Koppel, President of PC Connection, Inc., said, "We are pleased that the average Sales Account Manager tenure in our small- and medium-sized business (SMB) segment increased over the past year from 21 months to 25 months. In addition, the investments we made in building a new Internet Business Account (IBA) program began to produce results in the fourth quarter of 2002. Excluding MoreDirect, net sales for IBAs grew sequentially over the third quarter of 2002 by 32% and increased over the fourth quarter of last year by 78%. The number of IBA users as of December 31, 2002 expanded to 35,416, compared to 22,192 as of September 30, 2002."

Mr. Koppel added, "Growth in average tenure, along with enhancements to our Internet Business Account program, continue to be among our top initiatives to increase sales productivity. Over the past year, sales productivity for the SMB segment increased on an annualized basis by 12.6%, from $1.75 million in the fourth quarter of 2001, to $1.97 million in the fourth quarter of 2002. Higher sales productivity is the key to leveraging our expense structure and driving future profitability improvements." Desktop computers and servers accounted for 15.9% of net sales in the fourth quarter of 2002, compared to 11.8% for the corresponding period a year ago. Notebook computers accounted for 14.3% of net sales in the fourth quarter of 2002 compared to 20.5% of net sales for the corresponding period a year ago. Computer systems average-selling prices decreased 4% in the fourth quarter compared to the corresponding period a year ago, and decreased 12% compared to the third quarter of 2002. Gross profit margins, with and without MoreDirect, improved to 11.1% in the fourth quarter of 2002, compared to 10.9% for both the third quarter of 2002 and the fourth quarter of last year. Gross margins were higher due to improvement in product mix and selling margins. 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, as a percentage of sales, decreased to 9.7% in the fourth quarter of 2002, compared to 10.0% in the corresponding period a year ago. 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.

Zones, Inc. reported fourth quarter net income was $234,000, or $0.02 per share, excluding a one time after tax charge of $1.3 million, or $0.10 per share, related to its Washington State Department of Revenue tax audit for the period 1996 to 1999. Including this one time charge, the Company lost $1.1 million, or $0.08 per share, compared with a net loss of $124,000, or $.01 per share, for the same quarter a year ago. Total net sales were $104.7 million in the fourth quarter of 2002 compared to $114.0 million in the fourth quarter of 2001. Fourth quarter sales, excluding sales to a major customer, grew 6.7% year over year. Sales to small to medium sized business (SMB) customers grew 3.3% year over year. Firoz Lalji, President and CEO of Zones, commented on today's announcement, "Aside from the previously disclosed one time charge for the state tax audit, I am proud to state we would have posted our fourth consecutive profitable quarter; marking our first profitable year since 1996. The charge for the state tax audit does not tarnish or detract from the Company's accomplishments for this quarter or for the full year, and certainly is not reflective of our ability to operate a profitable company. Our sales for the preceding four quarters seem to be within a consistent range, and at this time we see no market trends that seem likely to substantially affect this pattern. In view of prevailing economic conditions, we continue to be cautious as to possible future sales growth or gains of market share." Zones said that sales to SMB, enterprise accounts, and Public Sector market were $85.8 million in the fourth quarter of 2002, and $343.4 million for the year ended December 31, 2002. The Company's business to business sales as a percent of total net sales for the three and twelve month period ending December 31, 2002 was 82.0% and 82.8%, respectively. This sales mix is consistent with the Company's direct model. Gross profit margins were 10.3% in the fourth quarter of 2002, a sequential decrease from 10.5% in the third quarter of 2002, and flat compared to the fourth quarter of 2001. This sequential decrease in gross profit margin percentage was primarily due to a reduction in Vendor programs. For the twelve months ended December 31, 2002, gross profit margins were 10.4% compared to 9.9% in the prior year. Gross profit margins as a percent of sales vary on a quarterly basis due to Vendor programs, product mix, pricing strategies, customer mix, and economic conditions.

Tweeter Home Entertainment Group said total revenue decreased 0.9% to $250 million from $252 million in the same period last year. Comparable store sales decreased 10.4%, excluding the two-store Hillcrest chain, acquired in March 2002. Net income for the quarter decreased to $5.2 million from $13.5 million for the same period last year. Earnings per share were $0.22 on a diluted basis, compared to $0.56 for the same period last year. Income from operations decreased to $9.1 million from $23.0 million in the same period last year. As a percentage of revenue, operating income decreased to 3.6% from 9.1% in the same period last year. This was due to a 340 basis point increase in selling expenses as well as a 160 basis point decline in gross margin. Overall gross margin decreased to 34.9% from 36.5% for the same quarter last year. While pure product margins were up slightly during the quarter, we received less in Vendor rebates and allowances than planned. This is a result of under performing on the sales plan with a number of Vendors, which resulted in missing several sales incentive goals. The large increase in selling expenses as a percent of revenue is primarily attributable to missing our sales plan by almost $37 million. This resulted in a leverage reduction in the areas of compensation, fixed occupancy costs, depreciation and advertising. Corporate, general and administrative expenses as a percentage of revenue increased to 4.5% from 4.0% last year, and this is also attributable to missing the sales plan and higher corporate infrastructure costs. Joe McGuire, Chief Financial Officer said, "We expect the inventory level at the end of January to be about $149 million, down from the $162 million level at the end of December. Our plan to reduce our excess holiday season inventory is on track, and we expect to finish the March quarter with inventory at approximately $140 million, and debt at $63 million. McGuire concluded, "For the quarter ending March 2003, we are expecting comparable store sales to be in the range of negative 5% to negative 8%, which will put revenue in the range of $193 million to $198 million. We expect EPS to be in the range of negative $.01 to positive $.03 for the March quarter. Included in this plan is an assumption that we will fall short on a number of Vendor sales incentive programs, causing gross margin to be down between 80 and 100 basis points for the March quarter compared to the same quarter for last year."

Jeffrey Stone, President and CEO said, "Our short- to mid-term goal is to run the business for profitability and forego store growth in favor of continuing to reduce our debt. This will result in strengthening what is already a strong Balance Sheet." Stone continued, "We have responded to business trends by re-forecasting our business plan for the balance of the year and in the process, eliminated roughly $6.6 million in budgeted expenses. Although we do not expect to perform at a negative 10.0% comparable store sales level for the balance of the year, if that scenario occurred we believe that we can earn $1 million in operating income and generate $20 million of EBITDA.

IT and electronics online Retailer dabs.com has today announced the acquisition of French company SOS Developers, an established specialist reseller of developer software with offices in both Nice and Paris. This carefully planned move represents dabs' first step in developing a pan-European business model. With a turnover of €15m (circa £10m) and employing 30 full-time staff, SOS Developers is both profitable and the dominant player in the French business to business professional software market, selling via both offline and online methodologies. dabs.com structured the acquisition deal with the assistance of legal advisors Addleshaw Booth & Co, led by Jonathan Priestley and financial advisors David Frith and Paul Daccus of Deloitte & Touche. Funded by dabs.com's internal cash resources following the continued success of the company's established UK operations, the total purchase price, which is dependent on the future profitability of the business, is estimated to be around €8m (circa £5.3m). The French operation will continue to be led by Managing Director and previous owner Daniel Levy, who will ensure maintenance of SOS Developers' existing business throughout the forthcoming period of integration with the dabs.com model. David Atherton, Managing Director of dabs.com explains the rationale behind this important acquisition: "We've been looking at European expansion for our consumer sales business for the past year, during which time we've closely examined several regional markets" he said. "Though French consumers are about 12 months behind the UK in terms of online buying, the composition of the overall French IT marketplace has much in common with that of the UK".

PC Mall reported consolidated fourth quarter earnings per share of $0.49 after a tax benefit of $0.41 per share on sales of $236 million. This compares with earnings per share for Q4 2001 of $0.20 per share after a tax benefit of $0.13 per share on sales of $176 million. As a result of the Company's improved earnings history, the Company recorded a tax benefit in both years, pursuant to applicable accounting guidelines to recognize certain tax assets, principally tax credits and tax loss carryforwards, not previously recorded. Sales for the quarter increased 34 percent from Q4 2001 and three percent from Q3 2002. Year-over-year sales growth excluding acquisitions was 14 percent while sales growth from acquisitions was 20 percent. Gross profit for the quarter increased by 31 percent from the comparable quarter last year in close correlation to sales. For the year 2002, consolidated sales grew 20 percent from 2001 reflecting the capture of market share by the Company. Year-over-year sales growth excluding acquisitions was nine percent and the remaining 11 percent was from acquisitions. Earnings per share for the year 2002 before the cumulative effect of a change in accounting principle was $0.62, which includes a tax benefit of $0.32 per share. Frank Khulusi, Chairman, President and CEO of PC Mall, said, "We continued our market share acquisition strategy in Q4 and maintained one of the fastest growth rates in our channel. Q4 2002 marks the fifth consecutive quarter of sequential growth in consolidated sales. We also continued to reinvest a portion of the incremental funds from our growth back into the business by building our Outbound sales force. While our strategy of aggressively increasing headcount was different than many of our competitors, we believe that this has allowed us to capture market share in a challenging economy."

Consolidated Q4 2002 sales increased 34 percent from Q4 2001 and three percent sequentially from Q3 2002 to $236 million. Outbound business sales excluding PC Mall Gov for Q4 2002 grew 23 percent over Q4 2001 and Catalog sales increased nine percent for the quarter compared to the same quarter last year. PC Mall Gov and eCost.com's Q4 2002 sales rose 15 percent and nine percent, respectively over the comparable period last year. The ClubMac and Wareforce acquisitions were responsible for 20 percent of Q4 2002's year-over-year consolidated sales growth.

Digest: An Update from Altec Lansing: According to Strategy Analytics, a Boston high-tech market research firm, manufacturers will sell nearly 42 million game consoles in 2002-an 84% increase over 2001. NPDTechworld, another leading researcher, reports that sales of MP3 and other digital music players were up nearly 150% for the first nine months of 2002. With music downloads, personal video production, PC-based DVD playback and other trends on the upswing, consumers are looking for audio speakers to fulfill a far different role than they have in the past. "For many people, the speakers they buy for their PCs, MP3 players, and other next-generation devices are now their most important audio investment, replacing the traditional home stereo speaker," said Mark Kapsky, Director of Marketing for Altec Lansing Technologies, Inc. "We believe this is a fundamental and irreversible shift in the industry. As the creator of the PC audio category, Altec Lansing is determined to continue its industry leadership by embracing these changes, and by educating people about the advantages of powered speakers for a variety of entertainment products."

Kmart announced a nationwide marketing campaign designed to redirect loyal consumers from those stores slated to close as part of the Company's recently filed plan of reorganization, to the next closest Kmart location. Beginning Sunday, February 2, Kmart will roll out its "Savings Are Here To Stay" promotion, which includes $150 coupon savings books, a series of $500 shopping sprees and special "relocation" materials developed to make a customer's transition from a closing store to a new store as easy as possible. As part of Kmart's "Savings Are Here To Stay" campaign, every store across the country, including stores scheduled to close, will receive hand-out coupon books good for up to $150 in savings on favorite national brands and Kmart exclusives. Using a coupon, shoppers who transfer prescriptions to a new Kmart pharmacy will receive a $10 Kmart Gift Card good towards their next merchandise purchase. Customers also will find savings up to $5 on Kodak photo processing in their "Savings Are Here To Stay" coupon books. The coupon books are good only at stores scheduled to remain open and are available chain-wide while supplies last. In addition, closing stores will distribute Register Reward Receipts (available 2/2 to 3/10) to customers who make a minimum purchase of $10 or more. The Register Reward Receipts are redeemable for savings of up to $12 off a purchase of $100 made at a nearby Kmart store which will remain open. Closing stores also will pass out maps and address information for the nearest open Kmart stores in every shopping bag. "While the closing of Kmart stores in certain markets is a necessary part of Kmart's drive to emerge from Chapter 11 as quickly as possible, we understand how it affects our loyal consumer base," said Julian C. Day, President and CEO, Kmart Corporation. "The 'Savings Are Here To Stay' campaign is designed to give our loyal customers the incentive and information they need to transition to a new store, while assuring shoppers nationwide that Kmart remains open and ready for business." Visitors to Kmart stores that will remain open will get a chance to enter to win one of 20 Kmart "Savings Are Here To Stay" $500 Shopping Sprees. Kmart's "Savings Are Here To Stay" campaign will be supported by newspaper run-of-print advertising running February 2, and in-store and parking lot marketing displays.

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NEWS

RetailVision® and Campaigners to Hold Industry Forum

Chicago - Consumer technology manufacturers and Retailers will gather to share their insights and discuss critical business issues when RetailVisionâ holds its first industry forum, March 28th, in Chicago. Co-sponsored and moderated by Campaigners, Inc., a national sales and marketing agency specializing in high technology, the forum will feature some of the biggest players in the consumer technology arena.

"We're looking forward to moderating what promises to be a very insightful and frank dialogue among decision makers regarding consumer technology trends," said Melissa Orr, President and Chief Executive Officer of Redondo Beach, Calif.-based Campaigners. "This is a unique opportunity for the movers and shakers in the consumer channel to come together with their peers and address common challenges and issues."

Now in its 12th year, RetailVision brings together decision-makers from top-100 level merchants with sales and marketing executives representing a full range of emerging technology products and channel services. Through Private Boardroom presentations, One-on-One meetings and networking events, attendees are able to develop new relationships and strengthen existing ties with their channel partners and peers. Presented by Vision Eventsä, a Gartner company, the Event will be held this year from March 25-28 at the Sheraton Chicago Hotel and Towers.

"We expect the industry forum to include representatives from such companies as Microsoft, Intuit, McAfee, Fujifilm and more," said Pete Prentice, Event Director of RetailVision. "It's a rare chance for this influential group to come together to discuss not only pressing issues, but also marketing and promotional opportunities and partnerships."

RESEARCH

Gartner G2: More Kmart Closings
Cutting Costs Isn't Enough for Survival
Gale Daikoku with Steve Smith

"Slashing costs without a corresponding commitment to a clear differentiation strategy is too little too late to rescue the chain from total demise."

On 14 January 2003, Kmart notified store managers across the country that it would close another 326 stores and lay off 37,000 more employees. This latest action to slash costs and reorganize under bankruptcy protection comes in addition to trimming 283 stores and 22,000 employees in March 2002.

GartnerG2 Analysis

The decision to close more stores came on the same day that Kmart announced a profit of $349 million for the month of December, despite a 5.7% decline in same-store sales for the five-week period ending 1 January 2003. The closings will reduce the chain to approximately 1,500 locations, and will reportedly be enough to deliver Kmart out of bankruptcy protection by April 2003 - earlier than anticipated. Bankruptcy protection has allowed Kmart to get out of leases for under-performing stores and exit extremely competitive markets (Dallas, Houston and other Texas markets). However, GartnerG2 is not convinced that even these additional store closings will be enough to salvage the company. Like many Retailers, Kmart continues to struggle in a challenging environment following one of the slowest Christmas seasons in decades. Slashing costs without a corresponding commitment to a clear differentiation strategy is too little too late to rescue the chain from total demise. The store closings indicate that the current executive team believes cost-cutting is the primary driver to lead the chain out of its troubles. Reducing the financial burden of under-performing stores and markets is an important first step toward recovery, but the cause of Kmart's woes is much more deeply seated. Kmart continues to lose customers to its two largest rivals, Wal-Mart and Target, because it still competes head-to-head against both rather than defining and implementing a consistent and clearly differentiated strategy. Kmart's strategy and go-to-market practices still fall somewhere between Wal-Mart's strong low-price positioning and Target's equally strong position as a discount merchant delivering an always-in-stock, fashionable, low-price assortment. Kmart continues to rely on its traditional toolkit by promoting its weekly specials and its branded soft lines (Joe Boxer, Martha Stewart, Sesame Street, etc). Promotional goods drive customer traffic and sales, but require strong planning and supply chain links to ensure product in-stocks. The current reorganization has neither improved in-store shopping conditions nor the in-store experience for customers, both of which contribute to further erosion of its brand and market share.

GartnerG2 Recommends

• Kmart must deliver-very soon-some indication to investors, to suppliers, but most importantly to its customers, of what its brand identity will be. And it must move beyond cost-cutting. Its decision to continue competing with supermarkets (approximately 50% of the SuperK formats remain) sends a message that there is little attention on what its differentiation strategy will entail. There must be focus and definite positioning for the chain to start the turnaround.
  
  
• A differentiation strategy will create lots of change, which will require a commitment and coordination by all parts of the company. Relaunching and rebranding require coordination between all departments. Retailers that have succeeded in turnaround situations, such as JCPenney, have done so under a strong leadership team that works together to refocus the company and market expectations.
  
  
• Kmart should suspend or dramatically change legacy business practices such as weekly-advertised specials that continue to expose the weaknesses of the company's supply chain and in-store conditions. Additionally, the company needs to define the target segments that can be served profitably and develop services that cater to these segments' special needs.
  

RESEARCH

News Story: NPD Sees Increase in PC Software Sales for 2002
Finance and Business Categories Experience Double-Digit Growth

In the overall software market, revenue from retail software sales during 2002 improved 3.1 percent, topping $5.7 billion, according to year-end numbers released by The NPD Group. "Retail software sales were strong in the third-quarter and by the end of September, retail unit volumes had closed the gap with the same year-to-date period in 2001," said Steve Koenig, Senior Software Analyst for The NPD Group. "However, double-digit year-over-year unit declines during the critical fourth quarter in key software categories including PC games, education, and productivity software contributed to a lower annual retail volume for software in 2002."

Retail sales of software titles surpassed 132 million units in 2002, falling 4.2 percent compared to 2001's results. Two software categories that experienced revenue growth during 2002 were finance (up 12 percent) and business (up 10.3 percent). As in years past, roughly two-thirds of the retail unit volume in the finance category is attributable to tax titles. Retail tax software revenues in 2002 grew almost 15 percent when compared with 2001. Overall unit sales of tax titles during 2002 improved 3.3 percent. This year's tax season is already off to a good start, with retail dollar sales of tax titles in December 2002 beating December 2001's figures by 7.1 percent. In addition, sales of accounting software also increased last year, with revenues jumping almost 19 percent.

"Despite competitive pressure from direct and on-line sales, tax software sales at retail continue to grow and the channel is crucial to competitors in this space for building brand awareness and winning new customers," said Koenig. "Expect sales of tax software to continue the growth trend into this year's tax season."

In the business software category, retail unit sales climbed more than 23 percent, while revenues moved more than 10 percent higher. Unit sales of system utilities spiked more than 17 percent, with unit sales of virus detection and disk back-up software jumping 29 percent and 46 percent, respectively. Robust sales of Microsoft's Office XP Student and Teacher edition drove the suite bundle segment to a unit sales gain of 38 percent in 2002. This title alone accounted for nearly 20 percent of the unit volume in the suite bundle segment last year.

Additionally, worldwide sales of video game consoles, game software and accessories shot up 10 percent in 2002 to reach $10.3 billion, breaking the previous year's record of $9.4 billion, according to a report released on Monday by market research firm The NPD Group. The report shows a slight decline of four percent in revenue from video game console sales, which earned $3.5 billion versus $3.7 billion in 2001. However, this number is tempered by price cuts for all consoles and a 10 percent increase in unit volume. The category of video game software, consisting of both console and portable software, saw sales gains of 21 percent in dollar volume and sold 15 percent more units in 2002 than in 2001. The report also notes that between August and December 2002, online playable games represented 15 percent of total game sales. For the full-year 2002, NPD reports the five top-selling games were, in order: Rockstar Games' "Grand Theft Auto: Vice City" and "Grand Theft Auto 3" for PlayStation 2; Electronic Arts' "Madden NFL 2003" for PlayStation 2; Nintendo's "Super Mario Advance 2" for Game Boy Advance; and Sony's "Gran Turismo 3: A-Spec" for PlayStation 2.

RESEARCH

The Consumer Interest in Digital Video Technologies
Media Center PC - Coming to a Living Room Near You
ARS: Breakdown of the Media Center Market
By: Toni Duboise, Desktop PC Analyst

In an initiative intended to revitalize the saturated consumer PC market, Microsoft, et al, have successfully launched the Media Center PC. Armed with Microsoft's Windows XP "Media Center Edition" (MCE) operating system, the Media Center PC emerges as a convergent device designed to commingle digitally enhanced computing and television into one cohesively wired, remote controlled unit.

HP was the first OEM partner to announce a trio of Media Center PCs on October 29th and by Comdex, in mid-November, the number of partners had grown to four. Most recently, this nascent Media Center PC market continued its growing trend with four new product lines announced in the beginning of January at the Consumer Electronics Show (CES) in Las Vegas. Now, the current cast of living room PC candidates for US markets includes HP, Gateway, Alienware, ViewSonic, CyberPower, iBUYPOWER, and ABS. (Tagar Systems and HP both offer Media Center PCs in Canada and Samsung in Korea). Shortly joining this list is Toshiba, who will also soon enter the US marketplace with its first-to-market MCE-powered notebook. With an apparent growing market momentum and Microsoft and its hardware-producing partners counting on their assumptions, your next PC could very well take up residence in your living room.

Not surprisingly, Gates has ensured that the commonality between Media Center PCs is Microsoft's MCE operating system (OS). The new MCE OS is essentially a Windows XP "Professional Edition" base with a new digital-centric interface. The MCE interface uses Microsoft nomenclature and immediately offers users the following options: "My TV", "My Music", "My Pictures", "My Videos", "My DVD" and "Settings". Each option offers a variety of ways to manipulate the data relevant to that category. For example, "My TV" contains a local show listing along with a myriad of video recording options, while "My Music" features detailed menus for storing, recording and listening to music files, and so on.

Beyond the universal MCE base, all Media Center PCs come equipped with high-performance components, some of which include large capacity hard drives for storing a deluge of digital media, stalwart processors and graphics cards, recordable DVD drives, wireless keyboards and remote controls. In addition, TV Tuners and S-Video ports accommodate televised media. In step with the bumped-up performance are premium price points that can range from $1,649 to $2,000+, though Consumers can opt to power down their versions of the Media Center PC by eliminating the recordable DVD optical drive and some other options. Although stripped down versions can be obtained for as low as $1,129 and as high as $1,599, ARS does not feel that these low-end machines deliver a full Media Center PC experience.

True Media Center PCs, like those represented in the chart below, are not for the faint of wallet or budget-conscious PC consumer. As shown, the estimated street price for a mainstream Media Center PC ranges between $1,649 and $1999. Most manufacturers offer up to three pre-configured systems, with the exception of the fully configurable models offered by Gateway and iBUYPOWER.

Note: In order to provide a fair market comparison, only mid-stream Media Center PCs configured with DVD-RW drives and a hard drive capacity of at least 120GB were chosen for this US product comparison.

As for price, little-known CyberPower, based in Baldwin Park, California, offers the best price/performance profile including a 19-inch CRT display for $1,699. HP's sans display 873n is almost on par with CyberPower, offering a stronger brand with half the video RAM for $1,649. In the middle of the pack are ABS and iBUYPOWER at a respective $1,799 and $1,819. The remaining trio - Gateway, Alienware and ViewSonic - register the three top-end price points from $1,929 to $1,995. Of these three, ARS feels that newcomer ViewSonic offers better value with its enhanced 2.8GHz processor and 40GB more hard drive space than its other two top-end competitors. ViewSonic's M2000, due in CompUSA and Fry's outlets in February, is also expected to provide a $100 mail-in rebate, reducing consumer end cost to $1,885.

With a price differential of $50 to $350, Media Center PC's early adherents will have a difficult time distinguishing which manufacturer offers the better value. Even though many of the feature sets appear to mirror each other, there are key differentiators. One example is the flexible six-in-one digital media reader, which is currently provided by three of the manufacturers - HP, ViewSonic and Alienware. Another is the speaker option, which includes a 2.1 (2 speaker, 1 subwoofer) for HP and Gateway, a 4.1 for iBUYPOWER and 5.1 for Alienware, ABS and CyberPower.

Beyond component sets and hardware features, ARS believes one of the key differentiators for this market will be form factor design. Based on the simple fact that the Media Center PC's primary objective is to invade the living room, more consumers will be concerned with its profile and presentation. Industry pundits have already coined a new phrase: "WAF," which translates to "Wife Approval Factor." The WAF - or at least something like it - will most likely play a big role in the successful mainstream acceptance of Media Center PCs.

With regard to form factor, the current ensemble of Media Center PCs is still somewhat limited, but there are a few standouts. Alienware for one offers a unique box-shaped form factor with a modest footprint of 7.4 x 7.9 x 11.8 inches. ViewSonic's M2000 system is a more streamlined metallic-silver tower measuring 8 x 18 x 16 inches.

ViewSonic representatives boast that its convertible design allows it to be utilized either horizontally or vertically and thus passes the WAF test.

CyberPower presents a metallic-silver horizontal chassis option that looks very much like a stereo component.

Taking a traditional approach, both HP and Gateway have housed their Media Center PCs in an updated, but familiar tower-like chassis that very much "walks and talks" like an ordinary PC. The standard tower chassis is prevalent in the remaining systems with the exception of a see-through or neon-lit side panel here and there. Based on the current space required by performance components like those offered by Media Center PCs, larger form factors like towers will most likely continue to be a mainstay within this market.

This is only the first evolution of Media Center PCs, but the concept fits in the natural progression of the industry. Multimedia-enhanced computing has been a leading market driver for consumer PC replacement sales for the past two years. The proliferation of .jpg, .mp3, .avi and numerous other digital media files confirms that PC and CE industry players have effectively transported consumers to the digital age. In this digital age, the logical next step for home computing devices will be to expand convenience by providing multiple access points throughout the household. Whether consumers will universally embrace this innovative convergent solution remains an open question. However, unlike the Internet Device market, which was side railed after several failed attempts, ARS feels confident that the convergence market has a guaranteed reservation in the household of the future.

[In fairness, it should also be noted that Sony offers a similarly-focused, sans-MCE RZ24G system for $1,700. Sony can be credited with the first-to-market convergence PC with the introductions of VAIO RX680G and RX690G desktops in February of 2002. Now in its fourth rev, Sony's VAIO RZ series offers S-Video ports, TV Tuners and Sony's original video-recording, media-centric software called GigaPocket.]

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COMMUNITY

Opinion: The Consumer Interest in Digital Video Technologies
Dr. Mark Cooper, Director of Research, Consumer Federation of America

My first trip to the Consumer Electronics Show was certainly an eye opener. This industry can definitely put pretty pictures of any size and shape on the wall, without taking up half of your living room. I use the pejorative expression "pretty pictures" to draw attention to a major problem confronting the industry. At my public policy session, a senior executive of a major Retailer assured the audience that he had no trouble convincing consumers buying large screen TVs to 'add the modest incremental cost of $300 to $500 to go digital.' These consumers, who were putting down several thousand dollars, understand that the future is digital and the increment investment makes sense. A seller of home entertainment systems whose sweet spot was in the $10,000-$25,000 range expressed the same sentiment.

• Today, the average American consumer spends considerably less than $300 for the whole TV, not an incremental add-on.
• The average American consumer spends less than $25,000 for an automobile.

If the consumer electronics industry wants to be a supplier of upscale niche products, it can go on selling pretty pictures to rich people. If it wants to break out and bring the digital video revolution to a broader set of consumers, it must get well beyond pretty pictures. It must offer more functionality at much more affordable prices by seeking a truly mass market. In order for a new appliance to be compelling to the mass market it must create new uses and applications, integrate them in a single device, and make them simple. The VCR survived its needless complexity because time shifting was a sufficiently valuable functionality to sustain its penetration, and the price dropped like a rock to the low triple digits. I do not believe the pretty pictures of digital TV possess those characteristics.

I doubt that the consumer electronics industry would voluntarily limit itself to the pretty picture mode. The real problem may be a cabal of content owners and high tech companies who will try to restrict consumer electronics to that activity. Hollywood and Silicon Valley, usually at each other's throats, have buried the hatchet long enough to seek to impose restrictions on how consumer electronics manufacturers can design and build their products.

They have already convinced the Federal Communications Commission to require digital tuners in all TV sets, when almost 90 percent of households receive their signal from a bit stream (cable or satellite) rather than a broadcast signal. They are also trying to force the inclusion of "flag readers" in all display devices - TVs, PCs, DVD player and anything else that receives or transmits a video signal - so that content owners can control the use of video material - eliminating consumer fair use rights. I am convinced that the result will be more expensive equipment that is less useful to the consumer, which will slow, not speed, the transition to digital TV.

I would not generally take sides in an inter-industry squabble, such as this, but I believe that the consumer stake in the outcome is too great to remain silent. I believe an open, consumer friendly environment best serves the consumer interest, and therefore interests of the consumer electronics industry. Every time industry groups impose limits on technology, they reduce the chances for the "all-hell breaks loose" competition we have enjoyed on the Internet.

A decade of analysis of the new digital media by the Consumer Federation of America has shown that policies that expand consumer choice with increased options and enhanced consumer control, encourage consumer use, speed adoption and stimulate innovation. Consumers are not criminals. They believe in fair use and legitimate copyrights. Instead of declaring war on us, the industry should seek a rational dialogue. Rather than forcing hardware into the system and reducing functionality, the industry must expand consumer horizons. The solution is to enhance and enrich the consumer experience, empowering consumers to participate more fully in the digital experience. That is the true promise of digital technologies.