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Can Profits Be Realized in Low End of Communications Business Environment?

A question that is occurring to many people in the telecommunications business these days is "how do we make money in the low end of the business?" That is, in telephone sets for home and small business use. The question is a good one because there are several factors which seem to be conspiring against anyone making money.

There are now over 160 million telephone sets in service in the home and small business markets. This is a market saturation level of over 95 percent, with about two phones per location . . . not a real growth situation.

Most of the sets now in service were manufactured to be leased to customers. Thus, they are "gold-plated" in the sense that they are extremely durable and this suggests that the replacement market will be slow to develop.

Also, most consumers and small businesses currently lease their equipment and these groups are very slow to change established habits. If they do purchase a phone it is unlikely that it will be the one they currently lease.

Another factor is the confusion in the market now regarding rate increases, the break-up of AT&T, long distance resale, and sale of in-place telephone sets by Bell will further reduce the willingness of consumers to make changes. When everything is channg, human nature encourages us to hold onto those things that are solid.

In spite of these problems, people will be "buying" phones and there will be money to be made. The key will be identifying those segments which are willing to buy and focusing effective marketing efforts towards them.

It is important that these efforts begin now, during the industry's transition from regulated to deregulated status. The airline experience has shown that this transition can be a painful one so it should be as brief as possible. Structuring a Program

Given the factors above, what should the manufacturer, retailer, operating telephone company or other participant look for in structuring an effective program?

* The Manufacturer. The key problem for the manufacturer will be maintaining distribution in department, discount and mass merchandise stores. This is where the volume potential is and these outlets will be looking for a tidal wave of demand for telephones in 1983 and 1984. When it does not occur, the first reaction will be to sharply reduce prices to move stock out the door and then reduce SKU's long-term.

Manufacturers can handle this by keeping tabs on retail inventories and working with retailers to move out excess stocks. The key is for manufacturers to convince retailers that they are in the market for the long haul rather than for quick profits. Proliferation of models and functions will generate incremental sales in the future, but such a program can boomerang in 1984. Manufacturers should focus on the basics in the next year or os. Too many models makes it appear that none of them are moving.

Any manufacturer selling five cordless models, ten decorator models and 20 assorted models of other types will be under substantial pressure to narrow the line from retailers. The retailer just cannot make a profit when sales are fragmented into such a large number of SKUs. Manufacturers who narrow the line and concentrate on low price at the low end (for the price conscious buyer) and high-tech features at the high end (for the innovator) will have the most success with both the consumer and retailer.

* The Retailer. The key problem for the retailer will be to convince consumers that a set purchased in the store is as reliable as the one obtained from the phone company. Retailers can handle this by carrying brands which are reliable, by setting up service centers or seeing that service centers are set up, and handling consumer problems with telephone sets promptly and effectively. Consumers do not view telephones the same way they do other durable products and retailers must cater to this uniqueness during the transition period.

Thus, there will be more costs associated with telephone products in the near term but those retailers which are willing to stake out a turf in the market will be able to reap the rewards after the transition.

In the near term, it will be necessary for retailers (particularly national retailers) to watch telephone inventories carefully because movement will vary dramatically from state to state.

* The Operating Telephone Company. The key problem for the independent telephone company will be assessing the future profitability of leasing telephone sets (in light of the radical changes in the industry) and structuring a plan to discontinue leasing if it will not provide a profit. This will depend on a number of elements including set acquisition cost, depreciation schedule, area mobility and more, which will vary widely from area to area. If leasing offers no profitability, then it will be necessary to access the issues associated wth entering the sale telephone business. Some companies may find that they can sell at a profit using telemarketing, catalogs, and pick-up points. Others may find it makes sense to work with local retail establishments. It is, however, unlikely that independent telephone companies will find it profitable to set up retail establishments themselves.

For the Bell Operating Companies, the critical issue is whether to participate in the low end telephone set business at all. Since these companies must start with a clean slate, they are in the enviable portion of having no "sunk" costs.

Regardless of how the sales develop in the near term, we expect that over the next five years, the market will rapidly shift from lease to sale and the telephone will cease to be unique, but will be comparable to the toaster . . . a small appliance. Companies which know how to market small appliances and have the appropriate distribution channels established will come to dominate the market. Traditional telephone companies must begin to adopt these techniques if they are to continue to control a respectable share of sets in service.
COPYRIGHT 1984 Nelson Publishing
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Copyright 1984 Gale, Cengage Learning. All rights reserved.

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Author:Solomon, G.D.
Publication:Communications News
Date:Jan 1, 1984
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