Editor’s note: Allan Krans is senior analyst at Technology Business Research.
HAMPTON, N.H. – Tell me if this sounds familiar: A technology company largely dependent on retailers for distribution decides to strike out on its own, hiring an executive from a leading retailer to oversee the opening of its own branded retail locations.
Microsoft’s retail store locations will not be a profitable venture for the company, but that’s likely all part of the plan. Apple is doing it profitably, but Microsoft is no Apple, and the list of other IT retail failures looms large, including failed efforts by Dell, IBM, and Gateway. Through its cutting edge technology and savvy branding, Apple built an entirely unique brand image that Microsoft, nor any other IT company, is likely to replicate. Whether Microsoft likes it or not, in the story
Microsoft opening retail store locations is the latest attempt to regain its mojo with consumers. Microsoft remains the standard operating system for business users, but lost its luster for consumers long ago, as evidenced by the company’s fourth quarter 2008 financial results.
Microsoft has already had at least one retail store. In 1999, it opened a large store on the second floor of Sony’s Metreon entertainment and shopping complex in downtown San Francisco. Among other things, visitors to the store could try out Windows CE-based handhelds and buy Microsoft apparel, souvenirs and shrink-wrapped software. The shop closed several years later, as did most of the other non-Sony-related businesses in the complex.
In a move straight out of Apple’s book, albeit eight years later, Microsoft announced it hired an executive from a leading retailer to oversee the opening of its own retail locations. Instead of hiring Ronald Johnson from Target, Microsoft hired former Wal-Mart executive David Porter to head its retail strategy, but the strategy as well as the din or pessimistic feedback are nearly identical. Apple’s retail venture turned out to be a great success, although in our view that’s where the similarities end. There are fundamental differences between Microsoft and Apple’s product set, customer perception, and distribution model that will likely produce much different results for Microsoft’s retail venture. If Microsoft intends for retail stores to drive revenue growth they will likely be disappointed, but leveraging stores to improve customer perception and as marketing tools could be successful.
Cart Before the Horse
In terms of demand generation, Microsoft is putting the cart before the horse. Stores do not draw consumers to products; innovative products bring consumers into stores. Apple’s retail store rollout coincided with the introduction of the iPod in 2001, which gave a very compelling reason for consumers to visit its locations. Microsoft brings no such compelling product to bear in its retail entrance, which makes getting consumers in the door a large obstacle to overcome.
Accept It – You Can’t Be David
Microsoft enjoys many benefits of being the largest software provider, but that also comes with its drawbacks. Microsoft cannot lay claim to being new, hip, or edgy, and its products are widely viewed as mainstream in the PC market, easier to use than Linux, but lacking when compared with Apple. Delivering a compelling message around the alternative is much easier than promoting the default product option, which is exactly what Microsoft has become. This view was reinforced by Apple’s “I’m a PC, I’m a Mac” advertising campaign, which conveyed Microsoft products as middle aged, while Mac conveyed a youthful image. Microsoft’s advertising campaign with Jerry Seinfeld was an attempt to counter Apple’s negative portrayal of Microsoft, but the effort fell well short of succeeding. Instead of emulating Apple, Microsoft may be better off accepting its role in the market, and molding its own retail strategy that highlights the unique value that its products provide
Biting the Hand That Feeds It
The third difference between Apple’s retail strategies is that Microsoft is totally beholden to a partner distribution model. More than 95% of the company’s revenue is driven by distribution partners, and the PC OEMs and retailers are the lifeblood of its highly profitable operating system and Office product sets. The issues with Vista already put many of Microsoft’s partners on edge, and a push into retail could further strain relationships with key distribution partners. Microsoft is already being delicate in addressing how this strategy impacts partners, stating the primary focus is on deepening customer understanding and relationships, and that Microsoft will share those insights to improve relationships with existing retailers and OEMs. Ultimately, partners are likely to realize the potential for Microsoft’s retail stores to erode their revenue is small, and that the vast majority of purchases will continue to be made through partners, which can offer much broader product selection.
More Marketing Initiative than Revenue Driver
We expect Microsoft’s venture in the retail space to be more similar to Gateway than to Apple, and its locations are not expected to generate any significant revenue or profitability for the company. Microsoft likely realizes this fact, and direct financial gain is not the ultimate goal of its strategy. Utilizing these locations to gather valuable customer information and improve its market perception could be very compelling reasons to invest in retail locations. Perhaps driven by the stability of its business or a lack of contact to its actual customers, Microsoft lost touch with the market. Without the direct customer interaction, Microsoft delivered an operating system with Vista that was too complex, not well integrated, and too resource intensive. TBR sees Microsoft’s retail strategy as an attempt to regain that customer interaction, simultaneously improving its customer perception while gaining valuable insight into what customers want, and how they’re using Microsoft products. Microsoft does not shy away from loss-producing investments, as long as there is upside potential in the future. If the company is willing to invest billions in Online Services, a few hundred million is no barrier to improving overall brand perception and product quality in preparation for the extremely consequential releases of Windows 7 and the further rollout of its Software plus Services strategy.