Wed, 07/31/2002 - 8:00pm
Craig Kuhl, Contributing Editor

Diverging interests and an unwillingness to break old paradigms
have cable’s retail set-top strategy going nowhere fast

Last winter, the cable industry's top brass toured the floor of the annual Consumer Electronics Show in Las Vegas and were blown away by the level of innovation and new products they saw there. DBS receivers with functional personal video recorders and interactive program guides from multiple vendors had them walking away from the Show with a renewed urgency to reach out to consumer electronics manufacturers in an effort to get more innovative equipment faster.

Ah, if only it were that easy.

It wasn't all that long ago when cable industry captains charted a new path leading to a retail set-top presence, with a stated goal to move the massive capital expenditure off their books. Simultaneously, some of the nation's largest retailers plotted their own course toward nirvana, with fully-featured digital set-tops leading the way.

Figure 1: Consumers have no clear channel preference, particularly for the purchase of emerging products, indicating a strategic threat to retailers.

But a lack of communication, differing motivations and the inability to break old habits have everyone involved stuck in a situation where all roads lead ... nowhere.

Retailers who thirst for new sources of revenue salivate over the possibility of being able to sell set-top boxes to consumers. "Give us a portable set-top box loaded with functionality and high-end features at the right price, and the shelf space is yours for the asking," they say. Manufacturers are echoing that same business strategy and promise to deliver the high-end devices needed to activate the retail set-top box business model.

Trouble is, there is no retail set-top box business model.

Pioneer’s HD box.

Despite several years of discussions among retailers, set-top manufacturers and multiple system operators (MSOs), little progress has been made toward building a viable business model that would allow set-top boxes to be sold via retail distribution outlets.

In fact, some experts maintain that retail discussions have actually pushed the retail/manufacturing/MSO triumvirate farther apart. That's simply because no business model can satisfy all three players, at least until advanced features are included at affordable prices, numerous logistical and compensation questions are answered, and open access fully takes hold, which isn't expected to happen anytime soon.

"MSO's don't see a benefit working with retailers or any business reasons to do it (sell set-tops through retail). Retailers are interested but haven't convinced MSOs or consumers of the value of set-tops at retail. So, until boxes are equipped with IP and other features, not much will happen," says Adi Kashore, analyst for The Yankee Group.

Some progress has been made by players such as Charter Communications and Scientific-Atlanta (S-A), who will jointly develop and market the Explorer MC home media center with Moxi (Digeo's media center which fuses together various advanced services), and by Motorola's BMC 9000. But moving a feature-rich, high-end box to a retailer's shelf requires some groundbreaking strategic shifts for MSOs, not to mention some major mindset alterations to overcome years of distributing set-tops on their own.

"Data shows there's an interest in high-end boxes at retail in the $300 to $400 range, and we'll start to see an interest in those. But MSOs don't know about the retail sector. They're pushing digital, so retail is a low priority. It will grow in importance, however, when set-tops become more full-featured. Until then, however, there's little reason to buy boxes at retail," Kashore argues.

One reason is lack of portability. How does a customer take a set-top box to another cable system and get it to work? "That's one of the biggest obstacles, along with customer service. There are big logistical issues, and retailers won't enter into any compensation models that don't work. We're making adjustments to those models and are in communication with the largest retailers, but we're not there yet," says Chris Caffrey, vice president of sales and marketing for Comcast Corp.

Comcast has a presence in about 1,000 retail stores via its cable modem service. Yet Caffrey readily admits the modem retail model is far different than the set-top box version. "Modems are a relatively easy sale at stores, but set-tops must have increased functionality and feature sets. Clearly, we want to be at the point of sale when customers buy cable-ready TV sets, but retailers won't have us in there if it doesn't make business sense for them."

What does make business sense for retailers is compensation. "The ultimate business model for operators is to help make it easy to have cable service. We would expect compensation for our service and in helping to reduce truck rolls, and we need to be in discussions to remove costs from the system. If someone leases a box for $3 or $4 a month, we can't find an economic model that can compete with that, so it's not economically feasible for us," said Alan McCollough, chairman, president and CEO for Circuit City Stores Inc., during a recent discussion at the NCTA show.

Nor can he find the set-tops at retail. "We're seeding the market with high-definition-capable sets. We've tried to buy boxes at retail and can't find them to sell," he added.

They're out there, experts insist, albeit without the business model to move them to retail. "Technically, the issues are manageable, so it gets down to the business model. We must figure out the right model and price points for the operators, retailers and consumers and help operators get capital (for set-tops) off their books. To this point, the models haven't been very attractive," admits Dave Davies, director of strategic marketing for Scientific-Atlanta Inc.

Nor is the thought of managing a sea of set-top boxes purchased through retail outlets. Says Kashore: "Set-tops are really access points, so if one malfunctions, the cable company is the first phone call a consumer makes. That's a real nightmare for MSOs. Returning a set-top box that's been purchased at retail to an MSO is a very inelegant solution, so there's little incentive for MSOs to push that model."

Figure 2: Bundled devices and services will allow the greatest range of consumer interaction and revenue streams for retailers.
Steps for enhancing product mix:
Use current product base as a starting point for device bundles.
Expand revenue and consumer interaction through enhanced bundles based on functional device convergence.

Extend bundles to include broadband, home networking
and additional services.

Yet some MSOs are exploring the feasibility of making set-tops available on local store shelves. "We've been able to partner with 500 retail outlets for modems and would like to drive to that number with set-tops. But we haven't worked well with the consumer electronics industry and legacy is an issue. There are only two set-top manufacturers, so OCAP (CableLabs' Open Cable Application Platform) is the glue," noted Chris Bowick, senior vice president of engineering and CTO for Cox Communications, during an NCTA show discussion.

Cox is trying to build a model with retailers to sell Scientific-Atlanta set-top boxes, says Beth Denning, director of sales and distribution for the MSO. "We're facilitating talks between S-A and retailers and hopefully can build a demand for set-tops at retail. There's lots of synergy among us to make it happen, but it needs to make business sense. It isn't something we're hanging our hats on, but it's very early."

OCAP could be the hat rack the industry needs to hang its set-top models on at retail. It's designed to be the technological solution that would foster a retail set-top model and would solve the portability question. The sticking point, some say, is that the business model doesn't jive with available technology.

"Manufacturers went to retailers and wanted to market an open access product, but that hasn't happened. Retailers are interested in selling digital TV sets, but plain vanilla set-tops won't sell. There's no viable business model, so services are the issue," explains Don Dulchinos, vice president of advanced platforms and services at CableLabs.

CableLabs recently hosted 16 companies representing the set-top box, software, applications and headend manufacturing industries in a round of interoperability tests, and in May released its OCAP 2.0 specification which extends set-top box portability.

Although it has the best of intentions, OCAP isn't perceived as being the ultimate solution to the set-top retail issue. Concerns over retail compensation, services, costs, marketing and a fundamental shift to a retail mentality linger. "Cable got smart when they went to the cable modem space, where the specifications were defined and a protocol existed. But there's no interoperability with set-top boxes, and going to retail isn't easy, or free," insists Kishore Manghnani, vice president of marketing for Imedia Semiconductor, a provider of software solutions for cable modems and set-top boxes.

The expanding digital market isn't helping either. Adds Manghnani: "By the time you introduce a new retail product, 35 million people will have digital boxes. So what's the motivation (for set-tops selling at retail)? And who's accountable for problems with the boxes? I don't see the motivation to go retail."

One motive may be unfolding in Canada, where both Shaw and Rogers cable systems offer set-tops through retail outlets. "The successful models are in Canada, where the cable operators subsidize 50 percent of the cost of a set-top box as a cost of doing business and apply a dollar amount to retailers. That's a difficult model in the U.S. with all the different systems, however. And, the typical set-top model has been a lease versus sell model at retail. So, even with OCAP, we don't see set-tops at retail until 2005," says Mark Gurvey, vice president of sales and marketing for Pioneer Electronics (USA) Inc.

Best Buy, whose officials wouldn't comment on the company's cable-retail strategy, or if one even exists, would only say it is "currently exploring possible business models with cable and manufacturers."

Those business models are elusive, at best. "How do you manage the marketing and distribution channels? They don't lend themselves to retail. Those are very complex issues for operators, and that's why it's difficult for them to see the business model. We haven't seen anyone put forth a compelling reason for boxes to go to retail," says David Novak, director of marketing for Pace Micro Technology plc, a manufacturer of set-top boxes.

Most experts agree it will take high-end boxes with plenty of advanced features such as personal video recorders, IP communication, HDTV capability and other components to entice consumers to pony up the money to buy them. And they must be interoperable. "It's all possible and OCAP will help, but I don't know if that makes sense to consumers. We have to cost-down the boxes to enable revenue for operators and figure out the right mix at retail. Retailers want it real bad, but they don't realize how difficult it is for operators to transition customers to pay for boxes instead of leasing them, and if it doesn't make money, operators can't afford to do it, especially in today's economy. Today, operators can't make money with boxes at retail," Novak argues.

And until the retail version of a set-top box is defined, priced, warranted and portable, there's little chance of a winning business model surfacing anytime soon. Says Davies: "There are a tremendous number of issues, and set-tops must be well-defined before they're rolled out. We have to collectively develop a business model."

When that happens, the upsides to a retail business model will surface, experts insist. "There's a strong opportunity for retailers to gain customers and clearly for us, too. There's absolutely some value to demonstrating HDTV and digital cable services in high-traffic retail stores. It's a great way to sell and expand the awareness of the product and drive revenue. We want to be out there in the mainstream shopping pattern," Caffrey says.

Getting there is the trick, and with few, if any, serious business models out there, most agree the time for a retail set-top box isn't now. "From the MSO perspective, it's an interesting new avenue to consumers and an opportunity for them to move consumers along to the applications side. But there's little reason to buy a box from a retailer today," concludes Kashore.


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