Carriers Relying More On Direct Sales, Survey Finds
By Joseph Palenchar -- TWICE, 9/18/2000
NEWTON, MASS. -- Wireless phone carriers rely on their own direct distribution channels more than ever before, according to a Cahners In-Stat Group report.
Carriers surveyed by the market research company re-ported that, on average, about 64 percent of their new subscriber activations are obtained through direct channels such as carrier-owned stores and kiosks, carrier websites, direct mailings and telesales. That's up from 57 percent in a 1998 survey of carriers.
The surveyed carriers also said they don't expect their percentage mix of direct and indirect activations to change much during the next two years.
In-Stat, owned by TWICE parent Cahners Business Information, also found that larger carriers are much less reliant on direct channels than smaller carriers. Among carriers with fewer than 1 million subscribers, direct channels account for 70 percent of new activations, but that percentage drops to 47 percent among midsize carriers with 1 million to 4.9 million subscribers and large carriers with 5 million or more subscribers.
For its survey, In-Stat interviewed 54 wireless service providers with a combined subscriber base representing about two-thirds of all U.S. wireless subscribers. Their responses were weighted equally regardless of their size, and they included 800MHz analog and analog/ digital, digital 1.9GHz carriers, and SMR/ESMR companies.
In-Stat also interviewed 96 non-carrier companies that sell wireless phones to end users. They included wireless/ communications specialty stores, agents, electronics and electronics/appliance stores, department stores, consumer-direct sales, resellers and others.
In other findings, In-Stat found that:
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A majority of indirect-channel sellers complain their profits per subscriber have fallen during the past two years.
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Indirect sellers' profits per activation, after any loss on a handset sale, range from $105 to $150 depending on the type of carrier.
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More carriers are offering advertising and co-op funds to indirect sellers.
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Analog and digital 800MHz carriers are reducing their residual payments to dealers, but 1.9GHz carriers are increasing them.
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On average, 1.9GHz carriers more aggressively subsidize handsets than 800MHz analog or digital carriers.
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And most carriers plan changes in their mix of distribution-channel types in the next two years.
Here are some of the details:
Compensation/Revenue: About 40 percent of the interviewed carriers said they've reduced compensation per subscriber to indirect channels during the past two years (see chart 1), but 58 percent of dealers claimed their compensation per subscriber decreased during that time. That compensation consists of commissions, residuals, key cities funds and co-op funds, excluding handset subsidies.
Thirty-three percent of surveyed carriers said their compensation per subscriber held steady during the past two years, and 27 percent said they actually increased it.
"While distribution channels are clearly extremely important to wireless service providers," the report said, " it seems contradictory to discover that the amount of compensation the carriers pay these channels is declining on a year-to-year basis.
"Apparently, wireless carriers believe that the sheer quantity of new subscribers coming on board will allow channels to make up in volume what is lost in the declining per-subscriber compensation they receive."
Dealers commonly experience losses on the sale of handsets, In-Stat noted, but activation commissions far outweigh these costs.
In-Stat also found that a plurality of dealers (44 percent) who offer both 800MHz digital and 1.9GHz services find them to offer equal gross profit per subscriber (see chart 2). The profits include commissions, residuals, key-cities funds and handset markups. Nonetheless, 32 percent said selling 1.9GHz service is more profitable, and 24 percent said selling 1.9GHz service is less profitable.
Across all service types, including 800MHz analog service, activation commissions and advertising/co-op funds are the most common means used by carriers to compensate dealers. In fact, during the past few years, advertising/co-op funds have become more popular with carriers.
Fewer carriers, on the other hand, are offering monthly residual payments compared to two years ago, even though "compensation programs that include monthly residuals allow carriers to stabilize churn," In-Stat said.
Among 800MHz analog and digital carriers, "the trend is to decrease payment of these funds," while 1.9GHz carriers are increasing residual payments.
Handset subsidies: Another form of compensation used by carriers, but not uniformly, is handset subsidies. About 66 percent of dealers selling 1.9GHz service buy handsets from their carrier at carrier-subsidized prices. Only about 23 percent of dealers get such buy-downs on 800MHz analog phones, given the lower cost of analog handsets.
On average, 1.9GHz carriers subsidize handsets more aggressively than 800MHz analog or digital carriers, In-Stat found. On average, carriers pay the same amount for 800MHz digital handsets as they do for 1.9GHz handsets, but the average dealer cost of 1.9GHz models was lower than that of 800MHz digital. The research company declined to reveal additional details.
Channel mix: Many carriers plan to change channels during the next two years (see charts 3 and 4). More carriers, for example, plan to add Web-based sales, resellers and warehouse clubs, and fewer carriers will use carrier-owned stores and kiosks.
This year, only 61 percent of polled carriers authorize sales on the Web, but 77 percent said they intend to sell though this channel in 2002.
The percentage of carriers selling through resellers will rise to 59 percent in 2002 from 46 percent, and the percentage selling through warehouse clubs will jump to 47 percent from 26 percent, if carriers follow through on their intentions.
Ninety-three percent of the polled carriers said they sell through carrier-owned stores and kiosks, but only 82 percent of carriers intend to sell through those channels in 2002.
Other issues: Carriers and dealers said they expect wireless data sales to increase and prepaid sales to decrease over the coming two years. As for training, only 30 percent of dealers said they are satisfied with the training their sales associates get from carriers. Wireless data growth could be jeopardized if training isn't improved, they said.
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