As the popularity and penetration of wireless communications spreads throughout North America, wireless carriers increasingly will use mass-market retail outlets and their own direct channels to distribute handsets and services. Wireless consumers might put a cellular phone on their shopping list along with a loaf of bread and a gallon of milk.
Wireless phones are widely available today in specialty and electronics appliance stores such as Circuit City, Best Buy and RadioShack. While those channels of distribution will continue to grow, carriers are looking to “put the product where people shop already,” said Tom Ross, a senior consultant with the Strategis Group. Carriers likely will target nontraditional retail outlets such as grocery, discount and convenience stores.
Personal communications services carriers especially have found third-party retail stores to be an advantageous route to distribute their product. It immediately gives the new companies-spending the bulk of their money on network buildout-many points of presence with low overhead.
Over-the-air activation is going to be a huge force in gaining a larger retail presence for wireless communications, because the large discount stores will be able to sell wireless phones and services much like they sell other consumer electronics.
“Over-the-air activation enables cellular and PCS providers to establish new channels of distribution because [the retailer] doesn’t have to worry about a contract, just sell the phone,” said David Freedman, a telecom analyst and managing director for Bear, Stearns & Co.
The right mix
Northeastern PCS provider Omnipoint Communications Inc.’s strategy is “to piggyback on the distribution that the cellular folks have started and then take it to the next step and broaden [the distribution] to places where people shop,” said Terry Hayes, senior director of sales for Omnipoint.
About 20 percent of Omnipoint’s business comes from its six company-owned stores in the New York metropolitan area, which “help out on customer service and give the company a physical presence,” Hayes said.
The operator has been successful in the mass-merchant retail market by selling boxed phones for around $50 and providing over-the-air activation with optional features that can be programmed into the customers’ subscriber identity module cards, said Hayes.
“Phones in boxes will be up there on the shelf with some minimal information offered by the stores about the service programs,” said Phil Redman, an analyst with the Yankee Group, Boston. “The customer will buy the phone at the store and interact with the carrier through the phone once they are home and decide which plan is best for them.”
While PCS providers eagerly signed up customers without requiring a contract through over-the-air activation, the contract-free retail method does have one major downfall: a higher churn rate.
The company store
That is one reason why the trend in the cellular market is to increase the number of company-owned stores. Another reason is the introduction of PCS has increased the retail competition because there are only a limited number of stores, which have limited shelf space.
In a company-owned store, the cost of acquisition is lower, and the carrier has better control over consumer education at the point of sale. Better education reduces the likelihood of a customer churning to another carrier when they realize they’ve signed up for the wrong plan, have the wrong phone or don’t understand features of their service.
In a mass-market retail environment, a carrier is “competing not only for shelf space, but for mindshare amongst salespeople,” said Redman. Furthermore, many young salespeople in mass-market retail environments don’t specialize in wireless phones and service.
“Carrier-owned stores and direct sales from carriers will be increasing because [direct channels] reduce churn by providing better customer service to the new user and to the current customer base,” the Yankee Group’s Redman commented.
Bell Atlantic Mobile has one of the most extensive chains of company-owned stores, bringing in more than 60 percent of the cellular carrier’s customers. The company “made a conscious decision in the early ’90s to open more direct-owned stores,” said Jim Gerace, vice president of public relations.
By attracting more people to buy at the stores, the acquisition cost per subscriber gets lower with each customer.
“While we’re not going to be opening stores at the same pace that we were in the early ’90s, we’re adding more volume,” Gerace said. Bell Atlantic’s strategy is to increase volume in both its direct and indirect channels.
“We like our mix right now, but we’re trying to put more volume through our company-owned stores,” said Gerace.
The remaining 40 percent of Bell Atlantic’s customers come from its indirect distribution channels, such as agents, dealers and mass-market retailers. The company did not disclose comparable churn rates, although its overall churn rate is 1.7 percent.
Another route
Some cellular carriers don’t think company-owned stores are the best route to take. For example, Ameritech plans to lay off employees and shift from its direct channels of distribution to mass-market retail and resellers as part of a $3 billion cost containment program.
David Gusky, president of the Telecommunications Resellers Association, agreed. The increased reliance on direct distribution channels “might be a current trend but it isn’t going to be a long-term trend,” he said.
“We wholeheartedly disagree with those people who predict carriers want more control,” Gusky added. “Carriers who continue to follow that strategy are going to find themselves in a lot of trouble.”
Since the beginning of cellular service, carriers have focused on signing up subscribers, not selling minutes, Gusky said. “In a duopoly structure that might work, but now, with five or six carriers in a market, and with the transition to digital, you’ll have tremendous capacity in markets. They won’t be able to offload the capacity. Resale will have to become more attractive,” he concluded.
Robert Lakin, chairman and chief executive officer of Brightpoint Inc., which provides distribution and fulfillment services to the wireless industry, said, “Resellers we believe will be successful in the future are the ones that compete on a worldwide basis and have a North American footprint through alliances or resellers. Roaming is a critical issue for the consumer.”
Brightpoint deals with all points of distribution and has both carrier and mass-market retail customers. Brightpoint’s carrier customers include Omnipoint, Nextel Communications Inc., Aerial Communications Inc. BellSouth PCS, Conxus, MCI Communications Corp. and WorldComm Inc.
About half of the company’s unit volume is directed at carriers, and the other half at dealers, agents and mass retail outlets.
“Five years ago, 90 percent of product went directly from the manufacturer to the carrier and 10 percent went through various other distributors in the industry,” said Lakin. “Those distributors were `pick, pack and ship.’ They never opened the box.”
Today, the model is closer to 80: 20, said Lakin. About half of the phones get shipped in pieces, and Brightpoint assembles, packages and distributes them, so “it’s not really comparing an apple to an apple,” Lakin said.
