Las Vegas — Last month during International CES, nine leading merchants, one buying group director and one industry analyst were cloistered with TWICE in a Las Vegas Hilton conference room. The ensuing 90-minute discussion was recorded for posterity and is presented here in an edited form. In the first installment of this two-part series, the assemblage looks beyond product to the high-margin service piece that will help consumers operate and enjoy the industry’s increasingly complex devices — and boost dealers’ bottom lines. — Alan Wolf
Dan Schwab, D&H Distributing: Service is going to be one of the primary battlegrounds this year. Home installation and service is what actually helps expand the market. Clearly the rate of technology is out-pacing the consumer’s ability to keep up and manage it. And it’s more than just the home theater system — it’s now tied into the home network, and whether you’re talking digital installers or large format retailers, everyone sees that need.
A really bright CE installer told me two years ago that it’s amazing that someone will pay $1,000 a year to keep their lawn green but won’t pay to keep their network up and running. That has really changed today because just like at the office, the home network is mission critical. Your system is always up. At work you have an IT staff to make sure it’s never down, and I think you’re going to see that starting to creep into the home more and more, and not just the high-end market. If you’re traveling on the road and you can’t dial in, or your spouse can’t get online to pay the bills, or your kids can’t do their homework, then that becomes a major challenge.
The technology is there to continue to grow the market and distribute the technology around the house and on the go. You’re going to see that people are not just selling products this year. A lot of people are going to be talking about solutions and what set of products really make sense. They’re going to find out that to really maximize the opportunity you need a knowledgeable person to walk consumers through the process, to install it and to provide ongoing service as well. I think you’ll see ongoing service models creep more and more into the marketplace.
Randy Wick, Circuit City: One of our key strategies in innovation is digital in-home services. We believe it’s a catalyst to where we have to go in the future. We believe digital in-home services will not just be the PC. It will be the complete home theater installation. It’s a huge focus because with product margins becoming a little bit less and less every year, it’s part of the revenue stream and profitability that we all have to really capitalize on.
We’re going to test and try a lot of different opportunities on the services piece. It’s a key focus for our company from an innovation standpoint and one of our key pillars for this upcoming year.
TWICE: Will the availability of in-home services through mass market chains like Circuit City and Best Buy’s Magnolia Home Theater shops commoditize the category?
Michael Vitelli, Best Buy: I wouldn’t call it a commodity. I think what Magnolia Audio Video does — and, to your point, even Magnolia Home Theater is looking at that niche — is an expensive and complicated proposition.
What’s interesting is that more people are stepping into it or making the decision to step into it. I’ve been surprised by that all last year. A year ago I was suggesting that the number of households that would spend $1,000 or more for a television set wouldn’t be as high as it was this year, and I’ve been surprised. Right now there is the highest number of TVs over $1,000, even if you adjust for inflation. It’s because people are saying, ‘I’m going to make a conscious decision to invest my time there because of the kind of joy that I get out of that experience.’
Richard Glikes, Home Theater Specialists of America: The good news for us is it is too complicated, and that’s an opportunity for people like ourselves and Flanner’s. We can go in and sell somebody a $50,000, $100,000 or $250,000 whole-house experience and live with that customer for six months, eight months or nine months. I’m not sure that Best Buy has the patience at this time to do that. We all kind of slot in our particular spaces in the market, and that’s why we exist. Luckily, it’s still complicated. I don’t think it’s quite ready for prime time. It’s not plug-and-play, and that’s an opportunity for all of us in varying degrees. Everybody is going after that higher-end dollar and realizing that the revenue on hardware is not the great panacea that we all thought it was.
Phil Jacobs, CompUSA: For over 12 years we’ve had an extensive network of what we call Technologists who will come out to your home or business and install and repair. This past year we’ve put a lot more emphasis on it. Research showed that nearly 70 percent of consumers who buy not just from us, but who buy technology need help, but only about 7 percent actually get it because they’re afraid to take that next step.
We have 20,000 Technologists around the country who can literally be in your home the same day or the next day if you call by 3 p.m. We put a lot of focus on that for the holiday season, and you would not believe the number of calls we had Christmas Day saying, "We got this stuff for Dad … What do we do now? Can you come out and help us install it?" It was like putting the proverbial bike together. A lot of it is simple stuff, routers and networks.
Ross Rubin, NPD Techworld: That’s not so simple.
Jacobs: Someone asked us, "Hey, will you do our refrigerator for us?" It’s not the complicated things or the things that are going to take more time and maybe cost $100,000, like you were referring to, Richard. People need help with technology and will continue to. It’s not just us doing that. There are other retailers who are doing the same things.
Schwab: When you think about spending $20,000 for an interior decorator, you know you’re paying a lot for service. It’s not just the couch and the carpet. If you’re going to buy a $5,000 TV, you’re OK spending hundreds of dollars to have it put on the wall and to work. We also have to realize that in today’s world everyone is time-poor, and there are a lot of people who, if they’re going to spend their discretionary income on technology, they’re probably willing to pay an expert to come in and help them install it and make sure it’s done correctly.
John Flanner, Flanner’s Audio & Video and PARA president: That’s slowly happening. It’s taken a while for people to appreciate the value of what we do. They originally looked at delivery as something that is thrown in, and they just didn’t appreciate how difficult it was and the level of expertise required. As they begin to appreciate that, they’ll put us on parity with the lawn service guy, and they won’t think twice about spending $1,000 within a year to pay for what we’re doing.
Glikes: We run this custom managers meeting every year where we bring in the heads of all of the custom departments of our 55 members and we lock them in a room for a couple of days. After we get the bragging and braggadocio over, in the final day of these conferences we typically ask them how much they make on labor and how many make a profit on it. In the last meeting, only one person raised his hand.
Everybody needs to understand that the $95, $100 or $125 labor rate is not enough. Everybody seems to be chasing the service model, but you can’t charge enough. We all under-charge for labor. We actually ran the Best Buy/Magnolia fee schedule against what we charge, and they were actually about 40 percent higher. I still wonder if they’re making money on labor because I think it’s a very difficult thing to do. Then we go back to hardware, and the margins are being reduced. It’s very, very challenging.
Jim Hamilton, RadioShack: The installation piece is a big up-and-coming piece of the industry right now, but I think the majority of people who buy product today are doing a lot of it themselves. That’s where RadioShack does extremely well. Our sales associates continue to be rated very high. In fact, NPD just rated our wireless associates as top of the class. We get those high ratings because our sales people are friendly, knowledgeable, conveniently located, and we’re able to answer a lot of installation-type questions when consumers buy the products elsewhere.
That’s how RadioShack will continue to play, as we’ve always been a place where customers look for new technologies. We did extremely well last year with Sirius satellite radio, digital imaging and MP3. RadioShack is evolving into a new company that’s focused on retaining its past but also looking forward.
We’ll still be out there helping people install or answer the questions to get their own systems installed. But I do think the bigger piece of the pie today is still people bringing it home, trying to do it themselves and suddenly realizing they’ve got a problem. Then they run to their local RadioShack store.
TWICE: Ironically, you were one of the first national chains to offer an in-home service program, back in the Nineties, and then you moved away from that. Is there any interest in re-entering the arena?
Hamilton: We were a little ahead of our time, but we’re still looking at all of that stuff. Everybody today is looking at improving their services. We’re certainly focused on either entering those markets or [leveraging] our partnerships with Sprint, Nextel, Comcast, Time Warner and so forth to bring broadband via the phone or the cable to the customer. We’re going to focus on all of those services that make sense for our customers. As somebody said, everybody today is looking at services to add onto the lower margins that we’re seeing in some of the product categories.
Will PCs Rule The Custom Install Roost?
Ross Rubin, NPD Techworld: I’d like to distinguish between two trends that the digital transition brings us. One is quality of experience, which you’re speaking to in terms of the immersion, the home theater, the speakers and the large flat-panel or microdisplay TV. The other is the flexibility of media and moving it around, and I don’t think they’re always on the same parallel path.
One of the things I’ve been struck by at CES is that after many years of talking about the notion of a home network, we’re finally seeing vendors actually step up with products that are network-aware. Companies are starting to embrace power line standards for moving products across network, and we’ll see faster wireless standards this year for moving stuff around.
If you happen to be one of the more technical users and you’re willing to give this stuff a stab on your own, there will be more options out there. For most consumers it will be a second PC as a media center. We have to consider that these things are still being sold, as promulgated by Intel and Microsoft, as platforms with the flexibility of a PC. The customer looks at that and says, "OK, this is my second PC that I’m going to be putting in the living room."
In terms of getting that stuff around the home, I think we’re seeing a greater commitment by the manufacturers to embrace this, but not necessarily moving in tandem with that quality experience, which for now remains primarily a local experience, that living room experience.
One of the issues that retailers face is bridging those two things, because today it’s pretty straightforward to bring home a DVD, pop it in and enjoy a high-quality experience once it’s all been set up. Throughout 2006 and beyond it’s going to start to
become easier to get a photo or piece of music off your PC, but it’s not necessarily going to be easy to have your cake and eat it too in terms of bringing those two together. That’s where the opportunity lies.
Dan Schwab, D&H Distributing: The gaming consoles are one way into the home that’s already in the living room. You see what Microsoft and Intel are doing with Viiv and Media Center this year. That’s the first time you really start seeing the usage models. Heretofore not many of the retailers or tier-one OEMs have been driving that in their ads, with all of the functionality. I think you’re going to see that more and more this year, which is going to bubble up the consumer demand.
There’s not one format. Some people are going to have home servers. Some are going to be running it off their gaming consoles. I don’t think there really is one clear winner, which is very healthy for the industry. That’s why they look to a lot of the people in this room as experts for advice, just like on the DVD formats. If there is always a clear winner, over time things become commoditized and there are fewer opportunities for the entire marketplace.
Joe McGuire, Tweeter Home Entertainment Group: We’ve done a fair number of home installs through Media Center PC and partnered up with Microsoft to experiment with our store here in Las Vegas. What we learned is that Media Center PC in that context is not an over-the-counter retail product. We would tell you that in that context, Media Center PC is absolutely a high-end install product.
We found that it will operate just fine to manage content. But the way that it interconnects with the other devices in your house, and the amount of programming care and feeding that needs to happen to make it a robust installation, it is still hard to do. Even as far as that technology has come — not just for the server but for all of the disparate pieces that it needs to talk to and be aware of — it still requires frequent truck rolls back to the customer.
Many of us, particularly those who have a teenager living at home, own $1,000 of digital content stuck on a hard drive someplace. What people now want is a shared experience, and to be able to move the content around to where they are. The technology exists today to do all of that, but it’s expensive, and it’s hard to do it in a robust way so that your house works. Just like we all used to joke 10 years ago about the blue screen of death, nobody wants to reboot their house. The tolerance and patience for that simply doesn’t exist, and so the technology around how to make that happen still has a couple of cycles to go before it becomes widespread so that far more people can do it.
You can enjoy the ability to seamlessly move content around your house today, but you’re going to spend $40,000 or $50,000 in order to do it, which puts it into a realm where it’s out of the reach of most people.
Richard Glikes, HTSA: Give us a call.
Rubin: The competencies involved in those kinds of installations are different from what we’ve seen in the traditional custom install channel, where a lot of the solutions that are still available now are based on that analog world. Stringing analog S-video cables around the house is very reliable, but it isn’t going to necessarily be able to grow and expand and bring in these new kinds of services that you get as you start introducing a PC, like satellite radio, Internet protocol television and other new sources of content that are finding a variety of ways into the home.
McGuire: Some of the very first people that will use that technology are the installers. Our installers couldn’t be more excited that you can now reliably distribute audio over an 802.something network. They couldn’t be more excited that there is actually a lighting control that uses ZigBee. All of a sudden the number of miles that you’re running inside of somebody’s house is getting cut out by technology, which is actually the start of the trend that will take those jobs that now are $50,000 jobs and start to move them to $10,000, $15,000 and $20,000 jobs.
That still sounds like a tremendous amount of money, but you’re going to see the cost of having that benefit in your house get cut in half very quickly. The reality is that people will start to treat that like any other home renovation, like another decoration. If you’re going to redo a room, for anybody around the table who has done it, $20,000 is not an unusual amount to spend.
I think you’re going to see the install channel itself among the first to
embrace some of these technologies because it will make their jobs easier. Being on your back in a crawlspace or doing the rafter dance
because you’re trying to get wires across is hard work. If you can accomplish the same task and not have to do all of that, even though you’ll still have to do some of it, it will make your installation easier and give you a more robust solution for the customer.
Where now maybe you have to send a crew of two or three people to live with somebody for a week or two, you might be able to take that down to just several days because you’re using technology to make the job simpler.
Michael Vitelli, Best Buy: Best Buy today has almost two independent home service teams, one being the Geek Squad. The way I think of it is — if it’s wireless, it’s the Geek squad. If I’m cutting a hole and pulling wire, it’s the home installation team, which we decided to bring in-house over a year ago to make sure we were using only our own employees.
What’s interesting is that it’s becoming more common that it’s a pair that ends up going to the home as you step up the installation: the person who’s skilled in the aesthetics of doing some of the work and then someone who has that technical knowledge of networking. That’s a great team to send. For the basic network things, the Geek Squad can go out and do that, and for the simple home installations, i.e., "I want my plasma TV on the wall," we have a person that is just doing that.
It is going to get increasingly more complex. It will be interesting over the next couple of years.