Monday, February 16, 2009

What will come of Microsoft Retail?

It seems that Microsoft has also decided to get into the retail business, and will be selling Microsoft products at retail outlets at various locations. Some say that this is a mimicking of Apple Stores, and some say Microsoft can also succeed where others have failed. The question before us today then, is whether or not Microsoft can make their retail stores successful, and if this will help their overall business. It is my belief that Microsoft should abandon the idea of Microsoft Retail, and stay focused on making software, and distributing the software to vendors.

I don't know exactly what caused this notion to start up, but it's bordering on the ridiculous. The only reason Apple stores are successful is because you can't buy Apple computers anywhere else, save for a few retailers. The fact is, Microsoft products are already at practically every retail outlet that carries computer products, and most of the time Microsoft products are already bundled into computers, so there's no need to specifically look for Microsoft products. Microsoft products are the norm, and so there really isn't a reason to get new retail stores that specifically sell Microsoft products. I have some serious doubt about how successful these Microsoft stores will be, because they are essentially competing with themselves, and the people who market their products. There's really no reason for this. A better idea would be to ask retailers to make a Microsoft only section, and even then I don't think it is necessary, because most of Microsoft's products come with the products, without anyone having to ask for it.

If Microsoft were to open its own stores, chances are, nobody will go there, because you can already get Microsoft products everywhere else. It's not a matter of helping customers getting more convenient service, but simply that you are putting together a whole bunch of Microsoft Products in one store, and not sell anything else. If we look at history, most retailers have failed, and Apple is the only one that hasn't. Why is this? It's not because Apple is great at retailing, it's simply because there's demand for Apple products, and you can't get them anywhere else, so people go to Apple stores. If Apple allowed many more stores to sell their products, I suspect Apple would see significant increase in sales, but then their own Apple stores will see same store sales decline.

We can already see that these Microsoft stores will not be helping Microsoft gain more sales or customers, and so the next question is, can it help Microsoft's business?
The answer to this is most likely a no as well. Every retail store that Microsoft has to operate will increase Microsoft's expenses, and thus increased their fixed costs, which amounts to lower profit every year. The greatest businesses are able to generate maximum profit and a high rate of return on equity, whereas the poor businesses have to continually increase fixed costs in order to grow, without actually increasing profit potential. Microsoft has always been one of the best businesses around, largely because it focused on software, and thus their fixed costs were extremely low, while production costs were practically non existent once you factor in the volume of software being sold. This allowed them to continue to reap hefty profits, without the hassle of having large expenses and/or production costs and price competition. Microsoft has been able to follow this philosophy, and thus generating many cash cow products that bring revenue without Microsoft spending on them heavily. The biggest cost that Microsoft had was research & development, but once you had the product, you could product it without incurring more production costs. Now that Microsoft wants to enter the retail market, they need to rent more, buy land, pay more employees, and they also have increased production costs by having to put their products at every store, unlike when they just loaded copies of software onto hardware from other manufactures.

This all adds up to the fact that, Microsoft will have a difficult time to make their retail operations successful, and if they ARE able to, then they have some VERY talented management. With the hire of a Wal-mart veteran, and the Microsoft internal reforms, they may be able to pull it off, and allow easier access to everything Microsoft, while increasing their brand name value, but that road will be long and hard. Fortunately, they may be able to snatch up land and lower some of their long term costs by starting this operation during a depression. Unfortunately, if they start in the middle of a depression, they won't see powerful results for a while.

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