kevin cabral's blog: bits+thesis

Microsoft has announced that it wants to open stores, and hired a Wal-mart veteran to manage them. Reacting to this, long-time Microsoft blogger Robert Scoble provided a number of suggests for “What Microsoft can learn about Retail from Apple and Best Buy.”

But upon reflection, I think Scobel has thought ahead too quickly. Before getting into who Microsoft should learn from, we need to have a good answer to the question of why it wants to open stores? What’s the problem to be solved? Only then can we come up with plausible tactics and talk about the incentives necessary to achieve them.

The first thing to recognize is that Microsoft’s context is completely different than that of Best Buy or Apple:

- Best Buy is a most successful retailer. They have immense buying power: their retail sales are nearly equivalent to Microsoft’s total sales. They sell diverse products so that almost every time a customer enters the store they end up buying something. For instance, Best Buy may use a loss leader like a discounted DVD to bring a customer into the store who ends up also shopping for a new computer. Consequentially, they’re incredibly popular with customers and obtain favorable lease terms from developers who wish to have them as an anchor tenant.

- Apple is a manufacturer and a retailer, but prior to opening their own stores they had no mass retail sales channel. 53% of its sales come direct from its own stores today. The Apple marketing message is tightly controlled by the company and well executed. This allows Apple to set retail prices that build in high margins on its products, allowing for the consistently high service levels and “customer experience” that they are so famous for. Making a suite of hardware and software, Apple captures almost all of the value from any sales that it generates.

- Microsoft, in contrast to Apple, is largely a software manufacturer (its hardware business is less than 20% of sales) which depends upon an ecosystem of Original Equipment Manufacturers and Retailers to sell its products in millions of possible configurations to a very diverse audience of home and office users. Collectively, these channels advertising spending dwarfs Apple’s $500 million ad budget. For instance, Dell alone spends about $1.5 billion. Microsoft lets these OEMs and retailers compete vigorously, and that’s one reason why Microsoft products are so much more inexpensive and varied than Apple. But this is also why customer experience and service levels vary.

This very different context ought to caution Microsoft NOT take too many lessons directly from Best Buy or Apple.

The fundamental question then is, what problem is Microsoft trying to solve?

• Is there not enough competition in retailing?
• Is there too much competition? Such that retailers cannot provide adequate service?
• Are retailers/OEMs not optimizing the presentation of Microsoft’s products or brand?
• Are retailers failing to sell complementary products which drive Microsoft sales, for instance Windows Mobile phones.
• Is Microsoft advertising so saturated that stores are the final frontier?

I’ll attempt to answer these in future blog posts but they are really important because there exist many alternative ways to address some of these questions besides opening stores. And opening stores carries with it many risks.

For instance, consider the possibility that Microsoft decides to open stores in great locations, near a Best Buy, and offer exceptional service but higher prices. Many of Best Buy’s existing customers will visit the Microsoft shop and receive fantastic customer service. Some, who appreciate good service, will purchase directly from the Microsoft shop. Others will free-ride and purchase at a lower price from Best Buy. The result in either case is that the customers who care about service are getting it from Microsoft. The result will be that Best Buy will be incentivized to actually reduce service quality. After all, the customers who shop at Best Buy now care about price almost exclusively. Thus Microsoft’s customer experience problems will have been made worse when it becomes the outsourced service arm of its retailers.