Retail channels follow device’s evolution of more choices, more complexity

Editor’s Note: This article is an excerpt from RCR Wireless News’ May Special Edition, “Enabling the Mobile Revolution: Mobile Chips, Devices and Accessories.” The 80-page special edition is available here.
The wireless retail environment has gone through dramatic changes over the years, swaying back and forth between an emphasis on carrier-owned retail locations that provide carriers with more control at a higher cost and third-party retail partners that defuse the cost of acquiring customers for carriers at the expense of end-to-end control.
Initially reliant on “communication” stores that specialized in short-band radio equipment to reach the public, the cellular industry now reaches out to consumers through carrier-owned retail outlets, third-party retailers and a growing number of online-only sites.
The current swing appears to be favoring third-party channels as a number of big-box retailers have increased their emphasis on the mobile space during the past year.
This does not mean that carrier-owned stores are out of style. Wireless carriers are still aggressively positioning their retail operations and are seen by many consumers as the direct path to a carrier.
While total numbers are nearly impossible to track down, the domestic industry’s second-largest carrier, AT&T Mobility, has more than 250,000 distribution points of presence spread across 2,200 company-owned stores and kiosks, 10,000 authorized agent locations, 8,000 national retail points of distribution for postpaid products and around 240,000 national retail points of distribution for prepaid services. In other words: good luck trying to avoid an establishment that sells wireless services.
Carrier-owned outlets
Carrier-owned retail outlets were once considered the bedrock of the mobile industry, allowing operators to control the distribution of devices and services all the way down the channel. These outlets were seen as a particularly important way for carriers to better educate consumers on the different facets of both rate-plan variations and devices as new technologies have increased the complexity of device and plan offerings.
However, carrier-owned outlets are also an expensive model for carriers and as such have ebbed-and-flowed in importance, depending on the evolution of new technology and the lack of support from other channels.
The growth of smartphones has also placed a greater emphasis on carrier-owned stores because consumers are looking for information on increasingly complex handsets right from the source.
Looking beyond AT&T Mobility’s more than 250,000 distribution points, rivals are also well positioned in the space. Current Analysis noted that Verizon Wireless operates around 2,600 retails stores and has a network of 6,000 national retailers and 4,400 local agents. T-Mobile USA Inc. places more of an emphasis on retail partners, and counts 2,000 carrier retail stores and about 7,200 partner retail locations. Those retail locations were bolstered in 2009, when the carrier added RadioShack’s nearly 4,500 retail outlets to its partnership list, predominately focusing on postpaid sales.
Sprint Nextel Corp. has placed a great emphasis on the importance of its retail stores through its Ready Now service, which tries to ensure customers walk out the door with not only a new phone, but with a phone they fully understand that has been set up to take advantage of all its capabilities. The carrier noted the service was targeted at consumers who are buying increasingly complex devices, but are frustrated because they don’t understand how to use the devices.
“Everyone seems to think that customers should know how to use their wireless phones or that they should figure them out on their own,” said John Garcia, president of Sprint Nextel’s wireless division when the Ready Now program launched in late 2008. “New smartphones and PDAs are as complex as they are popular, and most wireless customers use only a fraction of their features.”
The carrier cited a survey that showed 21% of consumers returned their smartphones following the 2007 holiday shopping season; not understanding how to set up their device was a primary reason for the returns.
Third-party retailers
Another aspect impacting the distribution of devices is the growing presence of large, third-party retailers like Wal-Mart and Best Buy.
Wireless carriers have long had an uneasy relationship with third-party outlets. Initially carriers relied on their own brick-and-mortar outlets to sell service because they reasoned that customers needed specialized information in buying service that traditional retailers lacked. This started to change in the late 1990s as a number of specialty retailers like RadioShack began offering wireless services, with analysts at one point noting that RadioShack accounted for up to 25% of all net customer additions in the wireless industry.
Best Buy is one of the biggest players in the space today, operating its Best Buy Mobile store-within-a-store at most of its retail locations. The outlets began by offering mostly prepaid services and some unlocked devices before acquiring a 50% stake in U.K.-based Carphone Warehouse plc in 2008. Since then Best Buy has expanded its presence in the mobile device space and now offers services from most of the larger operators and has been able to lock in exclusive handset offerings to differentiate itself in the retail space.
Scott Anderson, senior director of merchandising at Best Buy Mobile, noted the retailer has focused a lot of its recent attention on the growing smartphone space that it sees as a perfect match with the retailer’s electronics expertise.
“Complexity is good for us as that is what we focus on,” said Anderson. “Our wheelhouse is upgrading people to a smarter phone, whether it’s a smartphone or just a smarter phone.”
Best Buy Mobile also is increasing its online presence, having set up a type of virtual community site that allows customers to share their experiences with mobile devices as well as to provide tips and how-to’s to customers. Anderson noted that while the Internet is a great tool for consumers, many are still looking to get their hands on a device before making a commitment.
“The web is used for research and is critical,” Anderson said. “But people still want to touch and feel a device if they are going to commit to a two-year contract.”
Indirect channels
While big-box retailers have taken a large chunk from the third-party market, smaller retailers are still finding a place for their services in the so-called indirect channels. These retailers typically partner with a specific carrier to operator retail outlets that are branded similar to a carrier-owned outlet, but remove the operational cost burden from the carrier.
The Cellular Connection is one such operator that has partnered with Verizon Wireless and is now one of the carrier’s largest “premium retailers” operating 350 stores in the Midwest.
Scott Moorehead, The Cellular Connection’s president and CEO, noted that the relationship with Verizon Wireless has been beneficial for both parties and that despite the increased competition from the big-box stores, he thinks the retailer fills a niche others can’t match.
“The big-box retailers have a big control over pricing,” Moorehead said. “But, I think we win in the customer experience aspects. They have so much to focus on and can really only win on price. We think this is such a service-oriented business that in the end the customer service experience will win out.”
Moorehead noted that the past couple of years have been a boom for his company as Verizon Wireless sought to re-establish its third-party retail presence following the bankruptcy of big-box retailer Circuit City. Verizon Wireless in 2004 began operating a store-within-a-store at more than 570 Circuit City locations, a deal that pushed T-Mobile USA Inc. out of the retailer and installed Verizon Wireless as the exclusive postpaid provider at the retailer.
Despite the close relationship, Moorehead acknowledges that the retail market is becoming increasingly competitive for all involved and that competition for getting the attention of consumers is changing the way operators look at the space.
“I think one of the challenges for carriers is to reign in pricing changes,” said Moorehead. “They have their own stores and they need to make sure they can keep up the margins to run those stores before it becomes an unsuitable business model. It’s almost close to that point now and the carriers are becoming commoditized in the retail space.”
Online storefronts are growing
Online storefronts are also seeing increased interest from consumers. A recent report from Compete Inc. showed that about 8% of consumers that shop for mobile devices on a carrier’s branded site also take a look at devices from a third-party retailer’s site.
Among online retailers, Compete’s data showed that during the fourth quarter of last year, Wirefly garnered approximately 1.5 million unique visitors to its website, just outpacing Amazon.com, which saw a spike in visitors after the company launched a mobile-specific section of its website. CellStores, Letstalk and Best Buy all saw around 850,000 unique visitors during the fourth quarter, while Walmart.com and RadioShack saw just under 500,000 unique visitors during the final three months of last year.
For Amazon.com, the growth of online shopping for mobile devices has gone hand-in-hand with consumer confidence.
“More and more customers are comfortable with online shopping and research online in general,” said Jim Atkins, director of Amazon Wireless & Mobile Electronics for Amazon.com.
Atkins noted that while carriers are still dependent on brick-and-mortar locations to reach consumers, online outlets like Amazon.com provide a compelling value proposition.
“I think we have a great value proposition for carriers,” Atkins said. “We have unlimited shelf space, unbiased and consistent information. When talking to a salesperson in a retail store, they may not be an authority and may have their own biases.”
New models
Beyond the growing online presence of retailers, some handset manufacturers have also dabbled in the direct to consumer space.
Nokia Corp. was one of the first to attempt this approach in the United States with its Nokia-branded outlets spread across larger metro areas. The stores offered customers access to the range of Nokia devices, including unlocked models, but found success difficult in a market dominated by devices tied to specific carriers.
Google Inc. earlier this year began selling its HTC Corp.-made Nexus One smartphone direct to consumers through a dedicated website. The Internet search giant sold the device unlocked for $529 or with a two-year contract through either T-Mobile USA or AT&T Mobility for a greatly reduced, subsidized price.
The move looks to have been met with mixed results as further expansion of the device to CDMA-based carriers was shelved and more advanced devices running Google’s Android operating system have since popped up at most operators.
Analysts have noted that while the Nexus One might not have been a sales success, it prompted device makers to keep updating their Android-powered devices and has thus been successful for Google in pushing the OS’s development.