kevin cabral's blog: bits+thesis

I was going to write this post last week, but WordPress ate it. I haven’t posted since, and this points out a human tendency: after failure, sometimes we just want to turn the page and regain control. I think it’s plausible that this is what Microsoft’s trying to do with its stores and the strategy may be completely misguided in that way.

Let’s evaluate the fundamentals from my first post on why Microsoft might want to open a store:

Is there not enough competition in retailing?

On first glance, the loss of Circuit City, CompUSA and others suggests this. But I think the primary reason these players went bankrupt was from competition from Internet retailers: Amazon, Egghead, HP, Dell and even Microsoft direct. Overall, the demand for computer stores is lower than ever since online alternatives exist. There are, however,other types of  retailers going strong: Target, Wal-mart, Costco and Game Stop. Finding ways to help these retailers sell PCs well would be a good move towards Microsoft targeting segments which Apple ignores.

Is there too much competition? Such that retailers cannot provide adequate service?

A Catch 22  in retailing is that competition reduces prices, which is good for consumers, but also drives down margins which can, in turn, drives down service quality to a level that’s below what consumers would like. Manufacturers which desire for retailers to provide more service/promotion try to set Acceptable Price levels which lock-in a profit margin.

There is a great case that traditional retail is being out-competed by online, but is it also being out-serviced? A large percentage of customers simply prefer to buy PCs online because product information, service and configuration options are superior. This suggests to me that traditional retailers should be incorporating technology which gives customers the option to browse, configure and order PCs for home delivery from in-store locations. They need to start thinking of service as more than a guy in a blue-shirt.

Are retailers/OEMs not optimizing the presentation of Microsoft’s products or brand?

Are markets efficient? Corporate central planners often like to think not. They see competition as producing a race-to-the-bottom. If only Microsoft, Sony and Dell could “cooperate” to coordinate promotional dollars, then each would be better off.

There’s a case that cooperation can help avoid price wars and implement standards which are useful to the consumer. But this can also be abused: the promotion of Vista Capable computers is now the subject of a lawsuit alleging that Microsoft colluded with Intel and its OEMs to sell inferior computers to consumers. This coordinated effort ultimately did much to damage Vista’s reputation. If Microsoft would have kept its hands-off and let each re-seller determine how to promote Vista Capable given its limitation, it’s more likely that this product would have ended up with Vista Ultimate – unbought.  

So the argument that Microsoft ought to open stores in order to better coordinate promotion begs a question as to whether this is dangerous central planning. After all, the strength of PC platform is in its diversity. Dell has lines of PCs for home, student, office and corporate users; Staples presents information on PCs for small business users and Best Buy focuses on its segment. Microsoft lacks the “local knowledge” about consumers which can help it make decisions as well as its retailers. The result I suspect will be Microsoft stores which push a Redmond corporate line: the flavor of the week. We’ll see space devoted to Microsoft Surface, Zune and other products which consumers don’t want but Microsoft wants to push out to consumers. The result may be that the Microsoft store, much like Sony Style,  finds its niche in selling everything that nobody else wants to sell it.

Are retailers failing to sell complementary products which drive Microsoft sales, for instance Windows Mobile phones.

The argument here is that consumers have “unmet needs” for a “total solution” which Microsoft can provide. For instance, a consumer who buys a PCs will also need a printer and could benefit from the right digital camera as well. My evaluation of this is that if this is the best argument Microsoft has for opening stores, it’s living in 1995. That’s when I used to work for HP doing just that in CompUSA and Micro Center stores. Manufacturers and retailers have been busy at the cross-selling bit for some time. If Microsoft has discovered a new secret sauce, then it should be sharing it with its retailing partners rather than confining it to a few stores.

Is Microsoft advertising so saturated that stores are the final frontier?

Traditional advertising excels at helping you to buy things you never knew you really wanted. Note how much of television advertising is for soap and ketchup – things you aren’t searching for on Google. The argument goes that PCs are something that people are already very well aware of and which Microsoft’s partners like Dell already spend several billion dollars advertising.  Since we’re all familiar with what a PC does and where to buy one, advertising has limited value.

The argument thus goes that if advertising has limited value, maybe stores can help “form a relationship with the customer” or “engage the customer.” Perhaps that’s true: the Apple store’s Genius Bar is often seen as a great relationship-forming mechanism. Helping nip detractors in the bud by fixing their problems has been shown to be one of the most effective investments in customer service that companies can make.

I think this is the best argument for Microsoft stores, but it’s one that needs to be scoped according to what kind of relationship customers actually want with Microsoft. For the most part, I personally want a very limited relationship with Microsoft. The fewer error messages, the better. If I could accomplish it very quickly, I’d like to learn to publish to WordPress from Microsoft Word. But I don’t know that the Microsoft store can help me with that as well as I can help myself with a simple Google search. I also don’t want to haul one of my PCs to their store to get fixed. I’ll mail it back to Dell or Lenovo who actually have the right parts and incentives, to keep me as a future customer, to fix it. So I’m very skeptical as to whether the Microsoft store can accomplish its goals with me. Others may feel differently, but I sure hope that Microsoft has found them.

Conclusion

In conclusion, I don’t see a very strong rationale for Microsoft stores. But I acknowledge that many thought the same about Apple in its time so I can’t wait to see the counter-argument when Microshops start opening up. 

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.