Shopping channels: Less of a hard sell

It has always been something of a hard sell for home-shopping channels. As a whole, they've overcome image problems and carriage issues to become a multibillion-dollar retailing force. In fact, they rank among the highest-revenue-generating networks, according to BROADCASTING
CABLE 's Top 25 TV Networks. Now that they have widespread distribution on cable and satellite, they are spreading onto other platforms with conspicuous success.

The concept of a shopping channel came about as a fluke back in 1977. An advertiser on an AM radio station in Clearwater, Fla., couldn't pay his bill, and, in lieu of cash, the station owner accepted 112 electric can openers to auction off on the air. The can openers quickly sold out, and the station realized it was onto something. That local station owned by Lowell "Bud" Paxson- WWQT (AM) -created a regularly scheduled radio show that, in 1981, spawned a Tampa Bay, Fla.-based cable-access show called
Home Shopping Channel.

One year later, the show had earned a permanent spot on the Tampa system. By 1986, Home Shopping Channel had evolved into the publicly traded Home Shopping Network.

The key to the success of HSN and its competitors-QVC and ValueVision-is simple. "We're good at selling stuff to people," says Jack Kirby, president of HSNi, the interactive division of the Home Shopping Network.

Actually, they're not just good; they are experts at it. "They're basically testing things around the clock," says Josh Bernoff, principal analyst at Forrester Research. "They find co-hosts who are successful at selling things. They find a particular screen layout that works best. They find out what really sells at a particular price point. They have all these techniques that are very effective at turning viewers into buyers."

Turning viewers into buyers is a particular challenge for a television retailer. How do you convince someone who isn't close enough to the product to see it and feel it, to turn the viewing experience into a transaction?

Doug Rose, vice president of brand merchandising and development for QVC, says it has a lot to do with creating trust. "The customer needs to be confident that what they order is going to be to their liking." He says it's vital to become an advocate for the consumer. QVC and other successful television retailers invest in scrutinizing quality-assurance processes, fact-checking items and torture-testing them to make sure they stand up to the claims made by the manufacturers-all the sorts of things that if we were in a short-term business, we might not bother with, says Rose. "But we're in a long-term business, and it's all about creating this level of trust that will in turn create a repeat customer."

Building trust is important, but offering an interesting selection of goods and creative packaging also helps. For the most part, the channels hawk the standard assortment of jewelry, cosmetics, apparel, cookware and collectibles. But unusual items tend to do particularly well on the shopping channels.

"We've shipped over 1 million Maryland crab cakes all over the country," says QVC's Rose. "Typically, our success has been in products that aren't found everywhere. We excel at selling products that have a unique point of differentiation, that have a unique story to tell, and that are demonstrable on live television."

Exactly what type of viewer is compelled to buy a can opener off a radio show, or a box of crab cakes peddled on TV? The home-shopping audience is remarkably similar from channel to channel. And it's not the low-income trailer park dweller seeking a vial of Elvis sweat.

"The profile of our average consumer is female, mid-30s to high-40s in terms of age, generally pretty stable in terms of living in their houses for 10-plus years with a couple of kids and a husband," says Dick Barnes, ValueVision's chief financial officer. "The income levels were actually a little higher than we thought they'd be," he adds. The two highest skews for us, from an income standpoint, were $50,000 to $75,000 and $75,000 to $100,000. That's good, because that's an attractive consumer."

"It's very easy to look at a channel like that and say it's a channel for lower-income people," says Forrester's Bernoff. "People have been pooh-poohing them from the start. But they have a surprisingly attractive demographic, and they're very sophisticated at taking their audience and turning them into buyers."

And buy they do. The top-three shopping networks based on sales figures-QVC, HSN and ValueVision-combined for more than $4.28 billion in 1999.

Today those three networks reach more than 248 million homes worldwide. But reaching those households has been a challenge. Like all other cable channels, the shopping networks have had to compete for carriage.

For Comcast-owned QVC and for HSN, which is a subsidiary of Barry Diller's USA Networks, the road to widespread distribution has been a little easier. These channels have used their cable systems and cable-network clout to gain widespread carriage. For ValueVision and other smaller operations, distribution has been more difficult to come by.

Last year, ValueVision received a tremendous boost when NBC bought a 36% stake in the company. As part of the deal, NBC became ValueVision's negotiator with cable operators. "NBC takes ValueVision and packages it with a broader offering with their content and other pieces of NBC in those negotiations," says Barnes. "As a result, it's driven a lot more in terms of cable distribution than we ever could have done on our own."

While the NBC affiliation has helped ValueVision secure additional carriage, the company's distribution is considerably less than that of its top-two competitors. The network's 36 million homes are less than half of QVC's 75 million and far behind HSN's worldwide total of 137 million. As a result, in areas where cable operators have been stingy about providing an exclusive channel for ValueVision, the company relies on a common strategy: affiliating with a local broadcaster to take advantage of the must-carry provision of the 1992 Cable Act.

The must-carry rules require cable operators to carry all stations within their community that meet certain criteria, which includes historic carriage of the station on the system, a station's local service to the cable community, carriage of other similar stations in the market and evidence of viewership in the community.

Cable operators, whose analog systems had only limited space available, argued that home shopping channels were not operating in the public interest. Because of this, they contended that these local broadcast stations, which for the most part had weak signals and small audiences, did not qualify for must-carry status.

"When Congress adopted the must-carry rules in 1992, they left the question of whether home-shopping channels were entitled to must-carry up to the FCC," says Mark Palchick, a partner in the Washington office of Vorys, Sater, Seymour and Pease. "Congress basically punted."

In a May 1993 report, the FCC said that stations carrying home-shopping programming, assuming they deliver the requisite signal strength and meet all the other requirements for must-carry, were indeed operating in the public's interest and were therefore eligible for carriage. "When the FCC said home-shopping channels and specialty-format stations were in fact covered by the must-carry rules, a lot of people took exception to that," says Palchick.

Since that time, there has been an ongoing thrust and parry between cable systems and broadcaster-affiliated shopping channels attempting to get onto systems. When the local broadcaster is denied carriage, it has the option of petitioning the FCC for enforcement of the must-carry order.

In 1998, such a petition was filed by KTAQ-TV , which broadcasts from Greenville, Texas, about 35 miles northeast of Dallas. The station had added home shopping to its daily program mix in 1995. In 1998, the station was carried on a handful of systems in the eastern part of the vast Dallas-Fort Worth market, but it also wanted to get expanded carriage in the western part of the market on cable systems operated by Marcus Cable. When Marcus chose not to carry KTAQ to several communities in the Fort Worth area, the station petitioned the FCC for must-carry status. Marcus claimed that KTAQ had neither signal strength nor ratings presence in either cable or non-cable households in the communities in question. K TAQ countered with the argument that audience share did not count as much as annual sales in the area. It said that, in the areas covered by Marcus' cable systems, it generated between $750,000 and $1.25 million annually.

Although sales may imply viewership, it is not one of the statutory requirements the FCC considers for must-carry status. In December 1998, the commission dismissed KTAQ 's argument as moot.

Since 1995, KTAQ has split its programming between family-oriented fare and shopping shows provided by Pandamerica and Shop At Home. In early November, the station switched its shopping affiliation to ValueVision. The agreement gives ValueVision access to 560,000 homes in the Dallas-Fort Worth market via AT&T Broadband systems. Station owner Mike Simons says KTAQ is upgrading its signal and will be making another run at getting additional carriage on the systems in the western part of the market, which are now operated by Charter Communications.

"There are a lot of different ways to work with the cable companies," says Simons. "As we upgrade our signal, our new coverage does include those areas out west. We hope Charter will add us to their lineup. If not, we'll petition the FCC again."

The hope for shopping channels is that the expanded capacity of digital cable systems will reduce the necessity for must-carry squabbles. Another anticipated feature of the digital systems is the opportunity for enhancements and interactivity that could make transactions even easier. This and other emerging interactive platforms give the shopping channel executives plenty of reasons to feel optimistic about the future.

In July, Forrester Research released a study on "smart television" devices and services, such as TiVo, WebTV and Wink. Forrester predicts that by 2005, smart television will create a $25 billion revenue stream. Analyst Bernoff says, "Of all the things on television, the home-shopping channels are the ones that can gain the most by allowing people to complete the transaction right on the television screen as opposed to calling on the telephone. [They] will probably be better off, because these devices will significantly increase the conversion rates of people who are watching seeing something they want to buy."

All of the major shopping channels are exploring these developing technologies.

"We're looking at our current situation as a learning phase," QVC's Rose says. "In contrast to companies who see technology as the end, we always look at technology as a means. Our business is retailing. We look at technology as just new tools through which and by which we can sell more goods to more people."

If the Internet is an example of whether or not their audiences will adopt new technologies for home shopping, there is good reason to be optimistic.

"When the Internet emerged in the mid-'90s, there were some people in QVC who were fearful of what that might do to our television-retailing business," says Rose. "I can tell you that in the ensuing five years, our [television] growth rate has actually accelerated. Unlike other dotcoms that have struggled, we've taken to the Internet quite well, and it's been a profitable business for us."

ValueVision's Internet site has been a moneymaker, too. "We use the same product line and same fulfillment process as on the television side," says Barnes. "The main difference between us and other Internet players out there is that we already have the infrastructure in place. The Internet business this current fiscal year is about 5% to 7% of our total sales. It's growing much more rapidly than our TV sales. We expect, over time, it will become a bigger portion."

"We do find that consumers that shop both channels of distribution spend more money," HSNi's Kirby adds.

One reason they spend more money is that the online inventory tends to be more comprehensive. It includes whatever is offered on the television programming, plus additional items in the same brand line, along with similar items from other manufacturers. The Web sites also frequently offer merchandise that is no longer carried on the television side. "We're not space-constricted like on television," says HSNi's Kirby.

While all the retailers are enthusiastic about their online experiences and the potential of broadening their reach, they haven't forgotten their roots. "If we find that our customers want to use these new mediums, we'll be there," says Kirby. "But the fact of the matter is that our core business is our television business. It's very healthy, and it continues to grow significantly."

Home shopping's big three (based on annual sales)

Source: Individual companies