Friday, February 13, 2009

Why Microsoft Is Smart To Open Digital Lifestyle Stores

Today's Wall Street Journal Reports on Microsoft's decision to build its own retail stores and goes on to mock it:

“The failures of other stores opened by technology companies will loom over Microsoft as it launches its stores. In 2004, computer maker Gateway Inc. shuttered a network of more than 188 company-owned retail stores after weak sales. Microsoft itself operated a Microsoft store inside a movie-theater complex in San Francisco beginning in 1999, but two years later shut down the store — which showcased, but didn’t sell, Microsoft products.”

Frankly, comparing these two store concepts to Microsoft's business model and portfolio is absurd.

While MS makes no shortage of dumb decisions,
this one its really, really smart


Retail Real Estate

Flagship brand retail isn't about selling the goods in the store. It's about selling product in the surrounding 20 mile radius. Nike discovered this with its Niketown stores. It made more off of sales in the surrounding area than it did in store...and at its height, Nike's Chicago flagship was doing $1,200 a square foot.

The Microsoft store in San Franciso was an attempt to sear eyeballs, not to sell product. The location closed when Sony Metreon (the development) completely failed to attract the projected crowd. Things got so bad at this mall that Discovery Channel, an anchor tenant, found it was cheaper to pay rent on a closed 20,000 sf prime storefront than it was to keep it open.

Unlike 1999, high street retail space is going for pennies on the pound ... especially for a stable company like MS. At one point, Metreon offered to advance my client $600k to refit the Discovery Channel space for a new store concept. Even better deals will be available to MS. If they are smart, they won't pay rent on the spaces while flagships are under construction (likely 18 months).

If I were MS, to speed the rollout, I might be looking to gobble up a high-end electronics chain. I can only imagine that Bang and Olufsen's retail is sucking wind. Radioshack might be a larger acquisition target.

Microsoft Merchandise

Microsoft has an easier pitch than Apple. It's a lot easier to sell accessories to a system users have already made large investments in. Apple is trying to sell users up ... Buy the ipod first, buy the computer second.

Gateway's problem was that it had its own perishable equipment tied up on its shelves.
Microsoft isn't going to pay for HP's hardware ... they are going to sell shelf space. Microsoft will only tie up capital on long shelf life, high-margin/volume items like keyboards, xboxes and Zunes.

Let's take a look at MS's consumer portfolio 18-36 months from now. The combination of Win7 and the products the Entertainment and Devices Division is likely to roll out over the next 24 months make a very compelling story.

- The vast majority of prospects have will have bought into Vista or Win7.

- Windows mobile/Zune will be fixed.

- Surface-like devices will be more reliable and price competitive.

- MS will have many of its cloud computing datacenters up and running.

- XBox will likely stay in a #1 or 2 position.

Market Positioning
Apple has positioned its stores as museums that derive their character by being devoid of it. Yes, the effete liberals are hot on this...but what about everyone else?

If Microsoft simply provides endless tables of desktop computers, it's dead in the water. Frankly, Apple has already done this as well as it can be done.

If Microsoft is able to tell an egalitarian story using the very technologies it sells ... a sort of executive briefing centers for real people it will be a hit ...people like places that are full of great stories told through gee whiz tech.

This Microsoft Store is a place I will want to play ... and it's the most compelling scenario for a digital lifestyle store that I can imagine ... Oh, and everything will be demo'd on multitouch.


  1. And your smoking what? "Surface-like devices will be more reliable and price competitive." NO ONE WANTS a big ass table as a computer. It might look cool in Disneyland's house of the future. But it's not practical and is way too expensive.

    What does "MS will have many of its cloud computing datacenters up and running." have to do with regular consumers? 99% of the population has idea what a "cloud computing datacenter" is or care.

    The only thing MS has that has any mass consumer interest is the Xbox. Best buy is selling plenty of those already.

  2. @ Anonymous,

    Do you actually do research before you cast aspersions? Please, have some courage and use your name next time.

    1. Surface isn't a consumer device.

    iphones are one of the most profitable mobile devices in America. HP Touchsmart has exceeded sales targets...without any meaningful applications to support it.

    In 1990, noone wanted a mouse as a computer...the applications didn't exist yet. It took 5 years to create a meaningful software ecosystem.

    2. Cloud computing uh ... Streaming video, itunes, personal data warehousing, mobile web.

    I guess the ludites don't understand why users might want stuff like this, but I think they will. Blockbuster's stock has dropped 60% in the past year. Netflix has risen 40%.

    3. Best Buy is doing a great job at selling games, but not network services.

    Network services are where MS makes a pure ongoing revenue stream ... and it seems to be working.

    Get some vision. Read some books and stop smoking the wacky tabacky!

  3. Do you have a source for your stat:

    "Flagship brand retail isn't about selling the goods in the store. It's about selling product in the surrounding 20 mile radius. Nike discovered this with its Niketown stores. It made more off of sales in the surrounding area than it did in store." I am interested in using this, but want to understand the source.


  4. Yes, this was from first person conversations with a senior executive who played a leadership role in expanding Niketown stores.

    Sorry to be sooooooo long in responding.