Best Buys Bank On Connected- Services Plan

By Alan Wolf On Apr 5 2010 - 5:01am




MINNEAPOLIS — Best Buy said it will use hardware in the service of selling services as its go-forward strategy.

The plan, which is still coalescing, calls for the center of its stores to be converted into showcases for connections, content and services, which newly named Americas president Mike Vitelli described in a conference call last month as “the three big drivers of profit” for TVs, mobile phones and computers.

Vitelli said elements of the offerings, including mobile and wireless broadband services and streaming content from CinemaNow and Napster, are already available in Best Buy stores, but their presence is diffuse. Instead, the company plans to bundle them as easily presentable content solutions that will be sold in “connectivity centers” in the center of the sales floor — an area presently occupied by slow-turning music and movie software.

“We will put them front-and-center and show them in a compelling way, so the customer will say, ‘Gee, I want that,’” Vitelli said.

CEO Brian Dunn said the company is leveraging its global operations to test various components of the connectivity centers in the U.S., Vancouver and the U.K. — the latter within Wireless World stores operated by Best Buy partner Carphone Warehouse. Shari Ballard, who shares responsibility with Vitelli for the U.S. market as co-president of the Americas, said Best Buy is, among other things, studying labor models and the technology infrastructure needed to support the departments. “We’re really pleased with the results,” she said.

While plans are proceeding on schedule, and insights from the pilot are already being applied to the business, the executives offered neither further details nor a timetable for a rollout, which compelled Barclay’s Capital retail analyst Michael Lasser to describe the initiative as “a bit of an enigma.”

“The theory behind the approach makes a ton of sense, but it is difficult for investors to quantify the opportunity and it is hard to surmise Best Buy’s ability to execute the strategy,” he observed in a research note.

Goldman Sachs’ Matthew Fassler concurred. “Management has not spelled out the precise economics of these ‘connecting’ transactions, spoken to any metrics that would help investors measure success, or even made it clear that the company has succeeded with these initiatives with any scale to date,” he told clients.

“Further dialogue suggests that there are early signs of success that will be scaled up as the year progresses, with the expectation of a second-half payout,” he noted. “Over time, we believe the firm sees this effort as the salve to its ‘center of the store’ issue — the fading of entertainment software sales — and expect significant resets in 2011.”

Indeed, Dunn said the centers of the store will become a stage for a “connected world” strategy, in which “hardware is really the starting point, not the end. We plan to sell tens of millions of connectable devices that will grow our relationships with customers.”

TV, for example, had been a relatively low-attachment category given the number of sets Best Buy sells, and represents “only part of the equation.” A content connection, delivered through cable, satellite or an Internet package, “brings it to life,” he said, and “IPTV creates new opportunities.”

Dunn added that connection-related purchases are no longer considered discretionary and that staying connected has become “a non-negotiable,” as consumers have “no tolerance” for devices or connections that aren’t working as they should.

“We exist to make technology work for people,” he said, “and our goal is delivering a connected world.”

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