Retired aerospace engineer Wes Johnson doesn't test new airplanes any more.
But when he dropped $600 in March to buy a new cable set-top that allowed him to watch HDTV cable channels on his new $12,000 home-theater system, he became a test pilot for cable's new and unproven frontier — the push to move expensive set-tops off cable's books and into the hands of local retailers.
From the day it launched in 1994, DirecTV Inc. — cable's biggest competitor — has relied on major national retail chains such as Best Buy and Circuit City to help market its service, by signing up new customers who can buy DirecTV receivers at thousands of local stores nationwide.
In recent years, cable operators have started to sell such hardware as cable modems through retail outlets. But the industry has always operated its core video service by spending millions of dollars each year to maintain an inventory of cable set-tops, and it has sent cable technicians on truck rolls to install the boxes when it signs up new customers.
Cox Communications Inc.'s system here in Phoenix, which began to distribute some of the more expensive set-tops introduced by the industry — high-definition set-tops manufactured by Scientific-Atlanta Inc. — became one of the first U.S. MSOs to take a crack at the retail set-top model in January.
Best Buy is now selling S-A's Explorer 3270HD set-top for $499 apiece in its Phoenix area stores, where the boxes sit side-by-side with HD set-tops from Samsung, which makes boxes for DirecTV's high-definition service. Cox hopes that consumers, including current DBS subs, will sign up for its digital service and buy an HD set-top when they spend money on an HDTV set.
While the desire to move the expensive boxes off of its balance sheet was one motivator, Cox Phoenix vice president of marketing Tony Maldonado said the need to be on the same retail shelves as the satellite competition was a key driver.
"Presence is huge," Maldonado said. "It's a classic widening the net strategy, because if we're not there, and they are there, by default we lose."
Cox and S-A are selling the set-tops at retail through Best Buy and a handful of smaller retailers in the Phoenix area, but it's too early to declare victory. The companies face several challenges, including getting consumers accustomed to leasing their set-tops to buy the hardware; training local retailers on how to sell cable HD service and install the boxes; and developing packages that will make S-A-branded set-tops stand out on retail shelves that contain hardware from popular consumer electronics brands such as Sony and Samsung.
For Johnson — the retired aerospace engineer who installed a home-theater system at his new house in the Phoenix suburb of Sun City — the $600 price tag on his S-A set-top wasn't a deterrent.
"Spending $12,000 for a system, I figured I might as well do it right and be done with it. Another $600 wasn't a bank breaker," Johnson said.
Margin report
Buzz Jensen, vice president of Paradise Home Entertainment in Scottsdale, Ariz., also said that the cost of the set-tops hasn't been a big issue for his customers, who typically buy home theater electronics and furniture systems in packages ranging from $5,000 to $25,000.
Unlike Best Buy, which buys the set-tops directly from S-A, Jensen buys his S-A set-tops from Cox and resells them for $499, making a margin of about $90 on each unit. Jensen has only sold about 15 of the HD set-tops in the last seven months, but he said he's content with that number, since "most of our projects are moderate or large, so we're not really geared to do volume."
The feed from Mark Cuban's HDNet was running on several HDTVs in Jensen's store when a reporter stopped by recently. But while Jensen only sells S-A set-tops that run on Cox systems, he said the HDNet feed came from a DirecTV satellite dish on the roof — Cox hasn't wired the store for cable yet, Jensen explained.
Little churn
Cox's Maldonado said the high price of the set-tops pays an added bonus — reduced churn.
"It's [churn] like almost not there," Maldonado said. "When people pay $499 for something, I think there is an interesting consumer dynamic that kicks in."
Cox officials wouldn't detail how many HD set-tops have been sold in the Phoenix market, though Maldonado noted that "thousands" have been sold directly by Cox and other area retailers.
He also said a "surprisingly large number" of Cox's new HD subscribers are former satellite customers. Maldonado suggested they have become less committed to satellite, since the costs of DBS equipment have dropped dramatically.
"It's a double-edged sword," Maldonado said of the sub-$100 start-up packages now offered by companies like DirecTV Inc. "When those home set-ups were much more expensive, those customers were stickier."
The Best Buy outlet in Glendale, Ariz., is one of the retail chain's test stores. During a recent visit, the show floor contained more than 60 HD monitors and televisions, from a Daewoo 60-inch rear projection HDTV set to a 27-inch flat-screen Samsung HD set.
Many of the sets were arranged in living-room displays containing couches, chairs and home theater sound systems — similar to a display that the National Cable & Telecommunications Association plans to spotlight in the HD Pavilion, at this week's National Show in Chicago.
While the number of HD sets dwarfed the number of standard-definition TVs for sale in the Glendale store, one manager who asked not to be identified said that the store sells many more analog televisions than digital sets, citing lower cost as a key factor. So while price isn't an issue at a store like Jensen's Paradise Home Entertainment, which only sells HD sets, price remains a factor at a high volume consumer store like Best Buy.
Beneath one of the HD sets on display in the Glendale store sat one of S-A's HD set-tops. Below the box was a stack of S-A set-tops, still in their brown, industrial-looking cardboard boxes, which contained small "Scientific-Atlanta" and "Made In Mexico" stamps.
Next to the S-A boxes were RCA MSN TV receivers packaged in colorful boxes, and further down the aisle were DirecTV set-tops, also packaged in loud colors.
Asked which HD set-top was more popular — the S-A set-top sold to Cox subscribers, or a Samsung HD set-top sold to DirecTV subscribers — a Best Buy sales representative said the store sold more DirecTV systems.
S-A has never before sold set-tops domestically through retail outlets. Store sales have forced the company to develop systems for everything from designing more consumer-friendly packages to devising training manuals for salespeople who work the showroom floor.
S-A also needs to develop relationships with retailers such as Best Buy, said director of strategic marketing for subscriber networks Dave Davies.
Better packaging
The industrial-looking packaging that was on display at the Glendale Best Buy will soon be replaced with multicolored boxes, Davies said.
While S-A competes for consumer attention on the same retail shelves with popular brands such as Sony and Samsung, Davies said the company isn't daunted, citing the example of two home-networking companies that managed to dominate the sector with little-known brands.
"Linxus and Netgear came from nowhere, but they were experts in their category and they proved that they were the consumer choice in that segment," Davies said, suggesting that S-A is hoping for similar results.
When cable first kicked around the idea of retailing set-tops, one anticipated benefit was that the consumer would be able to bring home the box and hook it up himself, saving the local operator the cost of a truck roll.
Though Cox officials said they are beginning develop a program to train local retailers to install the boxes for consumers, the company continues to send a technician to each new HDTV subscriber's home for the installation.
"There is a technical reason," said Cox director of sales and distribution Beth Denning. "We want to ensure the clearest picture available, and also we will be working with retailers for an overall installation plan."
Cox is charging subscribers an installation fee of $49.95 for the HDTV set-tops. The installation fee and truck roll drew complaints from Johnson, the Sun City subscriber who said the technicians from the local retailer who installed his home theater system also could have installed the set-top.
"If you're going to let people sell the box, you've got to let them install it," Johnson said. "Keep yourself out of the act — make your money on the sale of the box, and don't try to force yourself into the picture so you can get some additional money there [on the installation].
Cox subscribers in Phoenix can only buy the HD set-top; there's no leasing option. But Cox is testing a leasing only model in some markets, while other systems will give subscribers the option of either buying or leasing the set-top, Denning said.
Last month, Cox launched HD service in four markets in which subscribers can only lease the S-A set-tops — Las Vegas; San Diego, Calif.; Oklahoma; and its Gulf Coast market of Pensacola and Fort Walton, Fla.
The MSO also launched HD service last month in Cleveland and its Northern Virginia system. In those two markets, subscribers can either buy the set-top from local retailers or lease the boxes from Cox.
The various models will allow Cox to see which method works best before it rolls out HD service nationwide.
Bring on DVRs
Next up for Cox: the MSO eventually plans to roll out HD set-tops with new features, such as digital video recording technology, Denning said. S-A plans to take the wraps off of one such set-top — its new Explorer 8000HD, which combines HDTV and DVR functionality — at this week's National Show.
Paradise Home Video's Jensen said that's good news for retailers like him, who are looking to compete with offerings such as DirecTV's UltimateTV system, which contains a DVR.
"If we had some more features that we could sell that would be much more similar to the features that the DirecTV and Dish Net people are selling, that would be a major help," Jensen said.
