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April 16, 2009

Windows versus Apple on the High Street

What is Microsoft hoping to achieve with its chain of retail stores? Can it compete with Apple? Steve Evans investigates.

By Steve Evans

It began rather quietly. In early February, Microsoft put out a press release revealing that it had appointed David Porter as corporate vice president of Retail Stores.

No fanfare, no glitzy press event, just the announcement that the ex Wal-Mart employee would, “Lead Microsoft’s efforts to create a better PC and Microsoft retail purchase experience for consumers worldwide through the development and opening of the company’s own retail stores.”

Microsoft gave very little away about what it is planning for the stores, insisting that Porter’s initial duty would be to identify the time frame, location and specifics of the retail store strategy.

Porter certainly arrives with a strong retail background. He joined Microsoft from DreamWorks Animation SKG, where he was head of worldwide product distribution. Responsibilities included overseeing strategy for worldwide home video, consumer products and licensing, and alternative forms of media distribution.

Prior to joining DreamWorks Animation, the studio behind animated films such as Shrek, Chicken Run and Madagascar, Porter worked at Wal-Mart, the world’s largest retailer. His final role there was as vice president and general merchandise manager of Entertainment. Significantly, this role included overseeing areas related to merchandise layout.

During his 25 years at Wal-Mart, Porter saw the company grow to record revenue for twelve months ended January 31, 2009 of $401.244bn, a 7.2% increase year on year. Income from continuing operations increased 3%to $13.254bn.

The firm employs over 2 million people and topped the Fortune Global 500 list in 2008, ahead of oil companies ExxonMobile, Royal Dutch Shell and BP. It is well ahead of its nearest retail competition in the shape of French firm Carrefour and Tesco.

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In 1999, Wal-Mart boosted its international operations by acquiring UK retailer Asda. Wal-Mart’s influence was soon felt at Asda, as the company overtook Sainsbury’s in 2003 to become the UK’s second largest retailer and opened a number of huge stores on the outskirts of towns, known as Asda Wal-Mart Supercentres.

All about execution

Selling cheap CDs, DVDs, electronics and clothes in the same stores as bread, milk and eggs is a good idea, a family doing their weekly shop may well walk out with a new television. But selling every-day groceries is very different to selling Microsoft software or hardware. People will need to go out of their way to enter a Microsoft retail store, and that may well be the first challenge Porter faces.

Microsoft has so far not revealed which of its products it will be focusing on in its retail stores – though there is a strong likelihood that it will concentrate on its consumer lines. CBR did request an interview with Microsoft but the company would only release a statement that read: “As far as what will be sold in the stores, this is also to be determined. Certainly they will include Microsoft’s own software and hardware products.”

This suggests that the company will be selling its Xbox games console and accessories and its Zune MP3 player, as well as software such as Windows OS and Office. But will that be enough to tempt people through the door?

“I can’t see a shopper going to a shop to get the latest version of Windows,” says Richard Anson, founder and CEO of consumer review and price comparison website “But it is a good idea if they want to get closer to the consumer space, which their foray with the Zune player suggests they do. The challenge is to understand the retail industry and the shopper. It’s all about execution.”

It is the gaming fans that could hold the key, Anson believes. “If they go down the gaming route, they are catering to a very particular community, there is a passion within the group that is almost religious,” he tells CBR.

That passion was demonstrated during the Tokyo Game Show in October 2008. Japan is not traditionally a successful market for Microsoft’s gaming platforms, but the release of Halo 3: Recon on the Xbox 360 saw the Microsoft booth at the show swamped as people queued up to play the game on one of 140 consoles the company had provided.

Sale of Microsoft’s consumer hardware devices in high street stores is nothing new. DSGi, owner of Currys and PC World, sells Microsoft software in the shape of Office and the Windows Operating System, hardware such as the Xbox console, games, and PC peripherals like mice and keyboards.

The opening of dedicated Microsoft stores could well impact stores such as Currys and PC World, but DSGi says it is looking forward to any potential challenge. “We’ll watch with interest to see how this story develops but competition is a good thing,” the company told CBR in a statement.

James Governor, an analyst at Redmonk, told CBR that this is a potentially damaging move by Microsoft. “I understand why they are doing it,” he says. “But there are an awful lot of dangers. Annoying your channel partners is not a clever move, and there is no doubt this will cause problems.”

DSGi’s current relationship with Microsoft offers clues to the potential strategy and identity of the stores. “Interestingly, Microsoft have already been working hard with us to increase their presence in our own store environment,” DSGi says. “The best example is at our first Currys Megastore near Birmingham, which opened last year and is proving tremendously successful. Microsoft has a high-quality dedicated area within the Megastore, staffed by Microsoft gurus.”

Lessons from Apple

This use of Microsoft ‘gurus’ echoes Apple’s ‘Geniuses’ – experts stationed at ‘Genius Bars’ to answer technical queries and do on-the-spot repairs at Apple’s very successful chain of stores. The company could do a lot worse than copy Apple’s approach to retail stores, Anson believes.

“Microsoft can learn a lot from Apple. Their stores have been phenomenally successful and make a lot of money. They are doing things for the benefit of the shopper,” Anson says.

The first Apple store opened in 2001, when stores opened in Tysons Corner, McLean, Virginia and Glendale, California on the same day and Apple has added over 250 since, including 20 in the UK.

The value of the stores is reflected in Apple’s Q1 2009 results, released in January this year. Its stores added $1.74bn revenue and just over $350m in profits, propelling the company to record quarterly revenue of $10.2bn and profit of $1.6bn.

According to the website the opening day of Apple’s store in Regent Street saw 11,000 visitors pass through the doors, while 1,982 were queuing up when its store in Ginza, Tokyo opened. It is difficult to see a repeat of anything like those figures at the opening of a Microsoft store. The company does not attract quite the same brand devotion as Apple, a devotion that Anson describes as religious.

Governor agrees: “The cult of Apple is alive and well – they can get away with things that Microsoft can’t. It’s easy to be Apple. What Microsoft is trying to do is get people through the door to see the products for themselves, to cut out the middleman, the press. Vista, for example, got a lot of undeserved bad coverage in the press.”

The success of Apple’s stores, and their geniuses in particular, will be hard for Microsoft to replicate, Governor argues. “There is a limited set of things that [Apple] Geniuses need to understand. Microsoft gurus will need to know a lot more, especially about Windows OS. However, Microsoft has yet to prove that it can deal with the customer experience, and moving into retail will not solve all their problems in that area.

“It can be a good thing, but the company should not waste too much money on it – perhaps start in one big city before a major rollout,” Governor says.

Lessons from Dell

In 2002 Dell veered away from its direct sales strategy when it opened its Direct Store Model, made up of 140 kiosks at malls and airports across America. People could not buy Dell products to walk away with there and then, but instead they were designed to enable potential customers to test Dell products.

People interested in a device would be able to consider the weight, the keyboard, the screen and any other aspect of the product they wanted to before committing to buying it. Once a decision had been made, a Dell representative would then place the order online to be delivered to the customer’s home address. This enabled Dell to add another bow to its retail strategy and offer something that cannot be experienced online – physically testing a system before purchase.

However the experiment did not last long as in January 2008 Dell announced it was abandoning its kiosks in favour of channel deals struck with a number of retail stores throughout the world – Best Buy, Staples and Wal-Mart in the US, Tesco in the UK and various European countries, and Carrefour in other parts of Europe. The move introduced Dell’s products to about 10,000 retail outlets worldwide.

There is a lesson to be learned here, says Governor. “Retail is really hard. Dell tried and failed. Sony tried and failed with its San Francisco store. Microsoft already tried retail, also in San Francisco, but that closed after only a couple of years,” he says.

So why has Microsoft chosen this time to open bricks and mortar retail stores? Recent figures from the IMRG Capgemini e-Retail Sales Index revealed that online sales figures for February 2009 saw a 13% year on year rise. Online retailer Amazon reported its best ever holiday season in 2008, when sales were up 17% from Christmas 2007.

By way of contrast, retail sales fell 1.8% in February on a like-for-like basis (which excludes new stores), while between December and February, like-for-like sales fell 1.4% compared with the same three months a year previously.

The move is a chance to gain control of the user experience that Microsoft loses with its channel partner program, says Governor. “Microsoft is facing significant challenges on many fronts, and it needs to regain ownership of the user experience rather than leave it to others. It has to ensure that the out-of-the-box experience is good. Apple’s stores have been a massive success and that is something that Microsoft cannot ignore,” he says.

CBR opinion

It is fair to say that Microsoft does not always receive the press coverage that its products deserve, and the reaction to this announcement was not overwhelmingly positive.

This could work, depending on what the company wants to get out of it. The company itself says that its main objective is to, “Change the buying experience for consumers around the world – to show and demonstrate Microsoft’s key consumer products in a deeper and more meaningful way”. If it succeeds in that aim – and it’s a big if – then this bold move by Microsoft may just pay off.

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