Microsoft retail stores a risky proposition

By Elizabeth Montalbano, IDG News Service |  Business, Microsoft, Microsoft Store

Microsoft's decision to open retail stores is a calculated risk that will likely prove a more challenging endeavor than Apple's move into retail eight years ago.

Microsoft said quietly last week it would open a chain of retail stores, framing the news in an announcement that it hired former Dreamworks executive David Porter to take on a new role as corporate vice president of a new Retail Stores division at the company.

The company offered little about its specific plan for the stores or where it would open its first one, saying only that it wanted to "transform the PC and Microsoft buying experience," according to a press statement.

Though Microsoft makes much of its revenue from selling software to businesses, the company has been increasing its portfolio of direct-to-consumer offerings with products like the Xbox 360 and the Zune digital media player.

However, its most popular consumer product, the Windows client OS, is sold mainly through OEMs and not directly off the shelf to consumers. The same also is true for its Windows Mobile OS, which powers smartphones that are sold in either consumer electronics stores or wireless carriers' retail outlets.

This presents a challenge for Microsoft because unlike Apple, it can't fill a store with all of its own products and will have to offer partner products as well, said Matt Rosoff, an analyst with Directions on Microsoft.

Because of the nature of its business, Microsoft can't provide the same kind of streamlined retail experience that Apple does, he said. Furthermore, the company's mission for its stores is complicated because partners may want a say in how their products are presented.

Still, Microsoft could leverage its retail stores to control the hardware specifications for Windows 7, the next major release of its client OS, in a strategy similar to one it took with a retail campaign it designed around Vista, Rosoff said.

To coincide with a multimillion-dollar Windows Vista marketing and advertising campaign last year, Microsoft opened a "store within a store" at partner retail outlets, and required PC makers to meet certain specs for the Windows Vista PCs sold in the store, he said.

"They said if you want it to be a feature in our retail environment, it has to have certain capabilities, boot faster, it can't be bogged down with junk," Rosoff said.

Once Microsoft has its own retail stores, it might try the same tack with future Windows PCs to maintain a strict level of quality for Windows 7 machines and other Microsoft-based consumer products sold in the stores, he said.

Microsoft's move into retail isn't surprising, as it has dipped a toe into this pond before. Microsoft opened a store featuring Windows-based mobile devices and shrinkwrapped software at the Sony Metreon entertainment and shopping complex in San Francisco in 1999. However, that store closed in 2001, and Sony said this week it is closing its Playstation and Style stores in that very same complex, which has struggled financially.

These closures point to another challenge for Microsoft: the global economic recession, which is a difficult environment for new businesses. However, Rosoff said Microsoft probably won't open its first store for at least another two years or so, and by then conditions may have improved.

Moreover, though Microsoft is having some financial troubles of its own -- the company missed its revenue expectations for its fiscal 2009 second quarter -- it still "has tons of cash and is still very profitable," he said. "If you're doing very well and you have the ability, you want to try to expand in a downtime."

Still, because Microsoft's business has always revolved around partners -- including retailers -- distributing many of its products, consumers may not be as inclined to visit a Microsoft store as they are to go to an Apple store.

"I wouldn't go out of my way to get to [a Microsoft store]," said Alex Carabelli, a Windows Vista user and deputy director of New York-based nonprofit Grassroots Initiative. He said Apple stores are the only place you can get most Apple products, so it makes sense to go to those stores if you want to buy an iPhone or a Mac computer.

However, "the market is saturated" with Microsoft products, he said, so locating a retailer that sells them is not very difficult. Carabelli said he'd prefer to go to the retail outlet closest to him -- whether it's a Microsoft store or not -- to find whatever he is looking for.

Whenever they appear, Microsoft retail outlets will at least have one less competitor. Circuit City, a major consumer electronics chain, began closing all of its remaining retail stores in January.

Another big question for the Microsoft retail stores is whether the company can pull off an appealing aesthetic design for its stores the way Apple has. Cutting-edge and user-friendly design for its products has never been the company's strong point, as evidenced by its Xbox 360 game console, Rosoff said.

"They were so proud of it but when I saw it I thought, it looks like a white-box computer," he said. "It wasn't the coolest design in the world."

Microsoft's Zune player, launched as a competitor to the Apple iPod, also has been criticized for its clunky design and so far has not been very popular with consumers.

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