Why Do Mobile Operators Run Retail Stores?

Why do mobile service providers operate retail outlets, when fixed network telcos and cable or satellite operators tend not to do so? Dish Network, which owns Blockbuster, is an exception in that regard.

Cablevision Systems bought the Wiz chain of consumer electronics stores in 1998 primarily because it believed those venues could showcase and boost sales of Cablevision services. It did not work. One might note that lots of “telcos” operate retail outlets, but those are mostly mobile focused stores.

So why do fixed networek video, voice and Internet access services seem not to feature use of  retail stores? The simple answer is “cost of sales.”

That pattern also can be found for other services such as water, electricity and natural gas. One is tempted to argue that the “not sold in retail stores” approach stems from the current monopoly or past monopoly conditions under which those businesses operated.

Under monopoly conditions, there is no need to “sell at retail,” since suppliers can assume consumers will have incentives to find the supplier, and quickly, whenever occupying a dwelling. Everybody quickly learns that “you call the company” to activate service at a new location.

That obviously works for products that are absolutely, or relatively, commodities, with a binary (on or off) character.

There are cost of sales issues as well.

As business-to-business products and services are sold direct to large accounts, using channel partners for small and mid-sized businesses, so consumer communications and entertainment services are sold using media (Websites, print, radio and television media) or contact centers (phone, email).

Consumer businesses of the service provider type generally rely on mass media for marketing and then fulfillment methods that include telephone and Web ordering.

Still, some would note that, for most prepaid mobile operators, retail stores account for between 50 and 80 percent of their sales, and also serve a vital role as service centers.

One therefore might be tempted to say that retail outlets are necessary in the mobile space because the purchase is complex and highly personal.

There are devices to select, application, usage plans (single user and shared plans) and “what do you want to do?” questions that are not simple to convey using mass media or even online outlets in some cases.

Beyond that, the mobile phone arguably is the most personal device any consumer uses. Under such conditions, the ability to touch and feel the device arguably is crucial to the purchase decision.

That might be increasingly true for other products as well, ranging from tablets and music players to some PCs.

It is hard to remember now, but Apple’s launch of Apple retail stores was highly controversial back in 2001, at a time when Apple’s lead product was the Macintosh line of PCs, and had three percent market share (sales) on a five percent installed base of PCs.

Financial analysts worried about the impact on Apple profit margins. Other channel partners (retailers) were worried about the new competition. Some just argued Apple would never create enough revenue to cover the expense.

The industry had seen computer retailer bankruptcies, which probably did not increase confidence.

Given the decision to set up shop in high-rent districts in Manhattan, Boston, Chicago, and Jobs's hometown of Palo Alto, Calif., the leases for Apple's stores could cost $1.2 million a year each, argued David A. Goldstein, president of researcher Channel Marketing Corp.

Since PC retailing gross margins are normally 10 percent or less, Apple would have to sell $12 million a year per store to pay for the space. Gateway does about $8 million annually at each of its Country Stores, Goldstein argued at the time.

In the background, PC sales also were dropping. But Apple had its reasons for launching its own stores. For starters, when a firm only represents three percent of sales, it is hard to get shelf space or sales support from retailers.

That made it harder for Apple to expose and showcase its products, since many consumers might find it hard to even find a store selling Apple products. The retail computing landscape was ruled by a handful of giants that controlled which products were featured, where and how.

The system wasn't working for Apple, so In 1998, the company began pulling out of several of these stores, including Best Buy, Circuit City, and Sears, to puts its focus into a "store within a store" concept it had with retailer CompUSA.

In early 1999, Best Buy actually dropped the iMac line, after refusing Apple’s condition that Best Buy stock all eight colors of the iMac.  Sears, Roebuck stopped selling Apple products because of inconsistent and unpredictable sales volumes.

The theory was that in the new Apple stores, buyers would be able to experience Apple products in a controlled environment that was made separate from the sea of PCs, laptops, and gadgets from other vendors. Similar efforts can still be found in places like Best Buy.

But these "store within a store" concepts pitted Apple's products against others in an environment where potential buyers would walk just a few feet to go look at what others were offering. Hence the attraction of the branded Apple stores.

The concept was not original. Sony had launched its own retail stores Gateway had launched its own branded retail stores earlier, but also had to close those 27 stores. Gateway also had pioneered the “store-within-a-store” arrangement with OfficeMax.

And Apple almost took another route: launching Apple-branded cyber cafes . In 1996, Apple was working with the Landmark Entertainment Group and Mega Bytes International to create cyber cafes in Los Angeles, London, Paris, New York, Tokyo, and Sydney, Australia. There visitors would be able to surf the Web, grab a snack, and use Apple's latest hardware and software.

In the last few days of 1997, the cybercafe idea was quietly abandoned.

Microsoft launched its own line of retail stores in 2009.

The point is that highly personal and complicated products might require a retail store environment, not just for original sale but for follow-on advice and support.

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