Why the Microsoft/Best Buy Relationship is a Big Deal

Since Apple introduced their retail stores, Microsoft has been amazed at the success of the Apple’s stores and watched somewhat in horror as people flooded Apple’s retail establishments while stores like Best Buy and others that carry PCs languished by comparison. Microsoft also went to school on Apple’s stores and realized that creating a store dedicated to the sales and support of a product is becoming more important today as more and more digital gadgets come out and consumers need some hand holding in the purchasing and support department.

Microsoft has literally copied Apple’s store idea and over the last two years have started to open stores of their own, often times in eye-shot of Apple’s stores in some of the bigger malls. However, opening stores, paying for the retail space and populating them with sales people is a very costly effort. Even if they had wanted to scale up to meet their needs, it would take time. This is something that Microsoft does not have a lot of these days as their PC world is starting to decline in lieu of people buying alternative devices that use iOS and Android instead of Windows.

Microsoft decided to work with Best Buy to create what many saw as a store-within-a-store section inside Best Buy similar to the ones that Best Buy already has with Samsung and Apple. While Apple’s presence in Best Buy stores is more like a dedicated section, the Samsung store is literally an actual store-within-a-store like program that is even staffed by Samsung employees who service customers in their concierge area which is kind of like an Apple Genius Bar.

Given this frame of reference, most people who saw the announcement about this Microsoft and Best Buy relationship figured that it was a deal similar to the one Samsung had with them. And given the fact that Microsoft wanted to replicate their own stores quickly, it makes sense that they could use Best Buy to make this happen faster.

But the deal is much more than this. The truth is that Microsoft will now actually take over the PC departments of 500 Best Buy stores in the US and 100 in Canada and actually run them. They will decide what products are carried, how they are sold and serviced and be able to even limit what the competition can carry in this PC section. Best Buy will still keep the Samsung and Apple sections separate, but any PC or tablet apparently now will come under the scrutiny and discretion of Microsoft as to its placement within the PC section of Best Buy that Microsoft will now run.

This is a big deal. On the surface, it looks like a good deal for Microsoft since it does give them total control of their Windows franchise within Best Buy. But imagine if you are one of the OEMs. You now have to negotiate floor space with Microsoft, who by nature has to support all vendors who use Windows OS in their products. This begs the question then of how Microsoft handles this. Do they give preference to the big players and totally shut out smaller players who have bet their future on Microsoft products? How do they sell one vendors product over the other if they want all of their partners to be successful? While this is a big deal, it also has the potential of being a disaster if Microsoft cannot balance their partner’s demands with the reality of a finite floor space for Windows products.

So, why would Best Buy be willing to give up control of their PC department to Microsoft? As you know, Best Buy has been struggling of late and with the decline in the PC demand and shrinking margins, this part of their business was really hurting. In fact, there have been a lot of rumors that Best Buy would have to close even more stores if their overall store sales continued to decline.

This is speculation on my part but I suspect that this move by Microsoft can be likened to the investment Microsoft made in Apple when Steve Jobs came back in 1997. You may remember that Microsoft gave Apple $400 million, which included some cross licensing deals as well as stock. At the time, Apple was weeks away from declaring bankruptcy and this cash infusion from Microsoft literally saved Apple from this fate and bought time for Steve to turn the company around. This was actually a cheap cost for them since they needed Apple in the PC business to keep the Justice Department off of their back given the monopolistic problems they were already having with the US govt at that time.

Best Buy moves a lot of PCs for Microsoft, even if their own profit in PCs continued to decline. If Best Buy continued to close stores and even potentially go out of business it would have a huge impact on sales of Windows PCs and Microsoft could not let that happen. In a sense, this most likely buys Best Buy time to concentrate on improving sales of their other products, things like TV’s, refrigerators, etc that in most cases still have healthy margins and lets Microsoft deal with a business inside Best Buy that is set to decline every year going forward. I don’t know the fine details of this deal but it probably guarantees them a minimum in PC and related sales that at the very least keep each PC department even regardless of PC sales, something that really would really impact each stores financials.

This relationship needs to be watched very closely as it could be a make or break deal for Best Buy and if Microsoft fails in their stewardship of the PC department of Best Buy, it could have serious ramifications for the PC industry in the US going forward.

Published by

Tim Bajarin

Tim Bajarin is the President of Creative Strategies, Inc. He is recognized as one of the leading industry consultants, analysts and futurists covering the field of personal computers and consumer technology. Mr. Bajarin has been with Creative Strategies since 1981 and has served as a consultant to most of the leading hardware and software vendors in the industry including IBM, Apple, Xerox, Compaq, Dell, AT&T, Microsoft, Polaroid, Lotus, Epson, Toshiba and numerous others.

6 thoughts on “Why the Microsoft/Best Buy Relationship is a Big Deal”

  1. “…Microsoft will now actually take over the PC departments of 500 Best Buy stores in the US and 100 in Canada and actually run them.”

    I did not know this. The information – and its implications – are fascinating.

    1. Not only products consumers don’t want, but a retailer with low customer satisfaction ratings. How is that a big deal?

  2. Word usage alert: in lieu means “instead”

    This is something that Microsoft does not have a lot of these days as their PC world is starting to decline instead of people buying alternative devices that use iOS and Android instead of Windows.

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