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Online Vs. Brick- & -Mortar Stores

Mon, 05/10/2010 - 10:06am
Andrew Berg

When Google rolled out the Nexus One, the wireless industry was perhaps more blown away by Google's accompanying retail strategy than the device itself. The idea that the Mountain View, Calif., company was launching a mobile phone was one thing, but a gambit to enter the online retail game seemed a bit ambitious even for a behemoth like Google.  

To be sure, sales of the Nexus One haven't exactly blown the socks off anyone, especially those who expected Droid or iPhone numbers. According to estimates from analytics firm Flurry, the Nexus One sold right around 135,000 units in the first 74 days, the same time it took the iPhone to reach 1 million in sales and the Motorola Droid to reach 1.05 million units.  

Few doubt that online retail will continue to grow. Forrester Research released a report in March that projects double-digit growth over the next five years to reach nearly $249 billion in the United States alone by 2014. But who is best suited to be an online retailer? And is an online-only approach really the best strategy?

A Case of Brinksmanship
It's almost suspicious how poorly Google's "super phone" performed, which makes some wonder to what extent this was more extravagant posturing allowed by Google's deep pockets. Chris Collins, a Yankee Group analyst who focuses on mobile packaging and pricing, says that while he doesn't think Google expected the Nexus One to fail on such a large scale, he doesn't think that "online retailer" is the company's highest aspiration.

"I am strongly of the belief that this was as much about brinksmanship as it was about actually wanting to drive significant volumes," Collins says. "I think that they'd like to kind of shake things up and get carriers to move more quickly than they would want to, and frankly Google does that with a lot of their activities," he says, noting the company's highly publicized fiber initiative.

So what does a shake-up mean to Google? Collins thinks Google is tired of pandering to the carriers' schedules for releases of new devices and what the company likely sees as an antiquated business model. "I think that Google would prefer that the carriers were in the business of just selling connectivity wholesale to innovators like Google, and then Google can figure how to package it and bring it market," he says.

Collins concedes that it probably wasn't all posturing from Google. "I don't think they'd want it to be an abject failure, but I think they made some missteps along the way," he says, noting that Google was perhaps naïve when it came to the very real challenges of customer service for its new device. 

Google is being forced to dilute its online-only model for the Nexus One. Most recently, Vodafone announced that it will begin selling the Nexus One through its own channels in the U.K. It didn't help that expectations were set for a Nexus One to be available for Verizon Wireless customers and then the first Verizon phone in the Google store actually turned into a pitch for the competing HTC Incredible.

Convenience of Online
Andy Zeinfeld, CEO of online mobile phone retailer Wirefly, was happy about Google's move to sell the Nexus One exclusively online because successful or not, it legitimized the channel. While he admits that only 14 percent of wireless phones are being purchased online, he has reason to believe that's changing.

Andy ZeinfeldZeinfeld says that consumers finally are understanding the benefits of buying not only their mobile phones but also their carrier plan online. The amount of information needed to complete a wireless contract was the biggest reason for the initially small start of online retailing of mobile phones, he says.

"We get a Social Security number in order to approve credit and I guess that adds a whole new dimension of fear for some people when they're buying online because of the potential for identity theft," he says.

But as people get more comfortable with online retail, Zeinfeld says many are beginning to realize the benefits of buying online – from time savings to a better selection. But it's price that remains the biggest motivator for his customers to buy their next device online.

For example, the Motorola Droid from Verizon Wireless goes for $199 after rebate at Verizon stores and on Verizon's website, but Wirelfy carries the same phone for $19.95 with no rebate. "You get the same exact phone, rate plan, service and network that you would from anywhere else. The only difference is you're getting the phone typically from us for much less money and you're getting a much better selection," he says.

So how can Zeinfeld do that? He says the massive savings he gets from not having the overhead of brick-and-mortar stores, or the employees to staff them, as well as the massive volume in which he deals, allows him to sell phones at prices the carrier can't touch.

Zeinfeld admits that Wirefly is best suited for those who know what they want from a mobile device. Newcomers to the smartphone arena, he says, are probably best served by going into a store and talking with a live representative.

The Blended Approach
While smartphones are all the rage, they're not for everyone, and the carriers are beginning to understand that overselling a customer amounts to nothing more than bad service. The problem is akin to a car salesman selling a single person a minivan for his or her daily commute; it's simply not the right fit. As a result, carriers see return and exchange rates on smartphones that range anywhere from 20 percent to 25 percent. 

David Owens, vice president of consumer marketing for Sprint Nextel, says that device education is one of the most important aspects of creating a successful store and online experience for customers. 

In addition to a host of online services from DeviceAnywhere – such as videos, tutorials and device simulations – Sprint was one of the first carriers to offer its customers in-store, personalized device training in the form of its Ready Now program.

"We actually added personnel so we could have enough folks so that you could take somebody out of the sales environment and let them spend 30 or 45 minutes with a customer, educating them on the key capabilities of the device," Owens says.

"We know that somewhere around 85 percent of people will do their research online before they make their way into a carrier store," he says, adding that almost the same percentage prefer to buy their device from a carrier store.

Owens confirms that a successful device retail strategy is all about a strong blend of Web and brick-and-mortar channels. "Your channel strategy must have a blend, leveraging the Web for research, education and buying," he says.

More than anything, though, Owens says it's important that as people begin using their devices for all kinds of new tasks, a carrier store has to become part of a community, like the grocer or the barber shop. "Your stores have to become a destination... I want that wireless retail store to be like the local retail store or local pharmacy," Owens says, adding that he wants Sprint stores to develop a relationship with their customers that operates on a first-name basis.

The Amazon Exception
Amazon exists as one of the few retail operations to successfully market and sell a piece of electronics, wireless or otherwise, exclusively online. Neil Strother, analyst at ABI Research, says that part of Amazon's success with the Kindle was it had already established itself as an online retailer in a very big way.

"They built a great online commerce extension and a process that consumers got used to, so when they decided to take the risk of going into a mobile device, they went back to their roots, their core business, which was books," Strother says, noting that Amazon's established customer base of avid readers was probably the Kindle's biggest boon.

But even Amazon is beginning to realize that a blended approach has its benefits, if not for the customer, then for sales. Just days after Digitimes released numbers that showed the Barnes & Noble Nook, which is available both online and in Barnes & Noble stores, had exceeded Kindles sales in the month of March, Amazon announced that it would begin selling its eReader in Target stores. Whether there's a connection is anyone's guess, but from an Amazon perspective, it certainly couldn't hurt.

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