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Mobile Device Sales May Be Best Buy's Best Bet

By Rob Spiegel
Nov 7, 2011 11:57 AM PT

Best Buy said Monday it would buy out Carphone Warehouse's (CPW) interest in its North American Best Buy Mobile business for US$1.3 billion. By purchasing the CPW stake, Best Buy is trying to shift more of its focus to mobile devices. Best Buy has asked CPW to stay on in a consultancy capacity for up to five years.

Mobile Device Sales May Be Best Buy's Best Bet

With sales of TVs and other electronics lagging, Best Buy is going to try for some revenue oomph by leveraging its position in the mobile device market. Killing its European expansion and juicing up its services portfolio may also help.

This year Best Buy will also close all 11 of the big-box stores it currently operates in the UK. The stores were launched in April 2010 as an experiment, but over the past year, they have become a drain on the company's financials.

Best Buy also announced Monday an agreement to acquire the IT and cloud services company mindSHIFT for $167 million. The mindSHIFT purchase will snug neatly with Best Buy's Geek Squad services to small- and medium-size businesses.

The new acquisitions live in two markets -- mobile devices and services -- that are not as vulnerable to discounting as many of Best Buy's electronics products. The company has been steadily losing sales to Internet giants such as Amazon.

Best Buy did not respond to the E-Commerce Times' request for comments by press time.

Going for the No-Discount Market

One of the clear side stories to its Carphone acquisition is Best Buy's withdrawal from the UK.

"This is the end of a high-profile deal with Carphone to expand Best Buy into the European market," said Tier1Research analyst Carl Brooks.

"This deal is really about a business failure and a redirection of efforts to grow sales," he told the E-Commerce Times.

That doesn't mean Carphone is going out of business.

"It is only the joint venture between Best Buy and Carphone -- called 'Best Buy Europe' -- that is collapsing," Brooks explained. "Carphone is not in serious trouble."

Best Buy's acquisition of Carphone's stake in its mobile business indicates the retailer sees a bright future in mobile devices.

"Best Buy's high-margin sales of cables and doodads and media are suffering," said Brooks. "You can often find an item Best Buy retails for $20 for $5 online."

Mobile devices and their plans are not subject to direct-from-the-source discounts, Brooks observed.

"An iPhone has a fixed price, so that's predictable revenue for Best Buy," he said.

Bye, Bye Europe

The initial joint venture with CPW was a tool to launch Best Buy into Europe. That didn't work, so now Best Buy is withdrawing from Europe while placing a bet on mobile devices in the U.S.

"When the joint venture was announced, Carphone Warehouse had big plans for replicating Best Buy's mobile phone success with Best Buy stores in Europe," Allen Nogee, principal analyst for wireless technology at In-Stat, told the E-Commerce Times. "That concept generally hasn't worked for the company."

Behind this story is the decline in electronics as a trusted income source. This is partly because of Internet discounts and partly because of the softness in the TV market.

"One needs to look no further than the demise of Circuit City to see how electronics purchasing is changing," said Nogee.

Buying habits associated with mobile devices are more attractive to retailers than the habits of TVs buyers, he noted. "People continue to replace their smartphones at intervals of less than two years. Why not? New phones are usually free or less than $200 at the most. The rest of the cost comes from service fees customers pay if they upgrade their phones or not."

The average TV is replaced every eight years, he noted.

MindSHIFT - the Attractive Services Sale

Like Best Buy's Geek Squad, mindSHIFT offers services, and online discounts can't easily hurt the services market.

"mindSHIFT targets small- to medium-size businesses for IT services such as running email servers and desktop support," said Brooks. "That will be a good fit for Best Buy's Geek Squad services arm."

The move to increase services, though, could come with its own traps. The Geek Squad hasn't been a bastion of superlative execution, Brooks noted.

"Customers usually hate it," he said. mindSHIFT, however, may be able to shift that perception.

"mindSHIFT has some real expertise and experience in doing IT support," said Brooks, and "a tidy little business supplying IT infrastructure, on-demand servers, online applications and hosting."


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