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Best Buy is a Dinosaur and Canary

Jan 24 2014, 8:00am CST | by

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Best Buy is a Dinosaur and Canary
 
 

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Best Buy is a Dinosaur and Canary

You might be tempted to lump recent news about Best Buy’s disappointing holiday performance into the long-running narrative about that retail giant’s slow slide toward irrelevance and extinction. Don’t. Or, at least, don’t stop there. There’s more to the story. And it makes the story even uglier—not only for Best Buy.

Yes, Best Buy is a dinosaur. But it is also a canary. The cause of its bleak quarter is an early warning for Apple, Samsung and others that hope to continue extracting riches from smartphones. It also signals strategic opportunities for Google, Microsoft, Amazon and others.

Dinosaur

Best Buy is being slowly and perhaps inexorably Amazoned . The fact that Best Buy has survived thus far is a tribute to the great retailer that Richard Schulze, Brad Anderson and others built. Unlike Circuit City, Best Buy has yet to crash into the ground—but only because it has so far to fall.

Let’s face it: The game is rigged against Best Buy. How else to describe a competitive dynamic where it has to compete on price against Amazon? Best Buy is battling a competitor that has a structural cost advantage, higher customer satisfaction and carte blanche from its investors to operate at slim margins.

Hubert Joly, Best Buy’s latest CEO, seems to be doing a valiant job of cutting costs. To win, however, he has to become more efficient than Amazon while improving customer satisfaction and delivering the higher margins that his own investors demand. What are the odds of that?

There will be ups and downs for traders in Best Buy’s stock (as the last 12 months demonstrate) but for long-term investors and the company itself, the trajectory is not promising.

Canary

Smartphones will follow a path toward faster, better, cheaper and less-profitable models. This is an inevitable consequence of Moore’s Law . Best Buy’s bleak performance signals how surprisingly fast that is happening. It is a warning that others must also face: Demand is softening, competition is intensifying and profits are shrinking.

Best Buy was particularly hurt by these factors because of its suspect business model. But Best Buy, which had committed to matching others on pricing, got its fair share of the market; the problem was that demand was soft across the board.

Looking forward, other players will have to contend with the rapidly changing smartphone market, too.

Smartphone industry players will be faced with more and more saturated developed markets in the US and Europe. Penetration has reached an estimated 60 to 70 percent in the US and Europe. Growth will become restricted by contract-renewal cycles and will require stealing customers, as opposed to meeting new demand. Qualcomm has already announced that it anticipates a slowdown in smartphones.

There are massive market opportunities in China, India, Brazil and other emerging regions. But these markets have a different dynamic and do not offer the rich veins of profits that Apple and, to a lesser extent, Samsung has enjoyed to date. Emerging-market consumers and mobile operators are more price-sensitive. Emerging markets are also filled with local competitors that are armed with faster, better and cheaper technology than Steve Jobs could have imagined in 2007 and that are ready to adapt to local tastes and conditions. These conditions do not bode well for Apple’s reliance on older iPhone models to compete in markets like India.

The more interesting competitive market laboratory is in China. Apple’s China Mobile deal now fuels an intense competitor ecosystem. Apple might do well for a time because of pent-up demand in a brand-conscious market. Over time, however, formidable competitors will emerge out of the intense competition for such a large, lucrative market.

In both developed and emerging markets, the rapidly maturing technology will force the industry to contend with a version of the rigged game that Best Buy is losing against Amazon—and this might be the biggest game changer of all. Instead of Amazon, the industry’s arch nemesis is Google.

Google, armed with Motorola, has the luxury of viewing smartphones as a channel for its core search business. It doesn’t have to make money on the devices. It just wants to push users to the Internet. Google will inevitably push smartphone prices as low as possible. Motorola CEO, Dennis Woodside, is already talking about a $50 smartphone .

This is analogous to Las Vegas casinos giving away fine dinners and great shows to draw customers to their casinos. It is just a matter of time before other major players, like Microsoft (armed with Nokia), Amazon (armed with the Kindle Fire) and Alibaba, adopt the same strategy.

The confluence of these trends will strike hard at the industry’s bottom line. Apple and Samsung enjoy more than 100 percent of industry profits, and these profits represent a significant portion of their respective corporate earnings. Samsung has already announced that its latest-quarter results declined both over the previous quarter and over the prior year. It is estimated that smartphone profits account for more than half of Samsung’s earnings. Because of intensifying competition, others might win market share, but expect more and more of the profit pool to be competed away.

The Need for New Killer Apps

Apple, Samsung, Qualcomm and others are not doomed to follow Best Buy to extinction. Unlike Best Buy, their assets and scale remain immensely valuable. Apple, in particular, is at the top of its game. It will undoubtedly announce another “best quarter ever” next week. It still has much work to do to reap the benefits of its China Mobile deal, but no competitor or new business model has yet turned its strengths into liabilities.

The importance of Best Buy’s canary-in-the-coal-mine warning is that it signals that now is the time to get very serious about the Next Big Thing. There is bound to be one after smartphones, and, by all rights, today’s leaders have first rights to invent it.

Can they do it?  Please share your comments below.

* * *

Chunka Mui is the coauthor of The New Killer Apps: How Large Companies Can Out-Innovate Start-Ups . Follow him at Facebook , Twitter @chunkamui  or at Google+ .

For more on the challenges of translating success in one computing class (e.g. mainframes, minicomputers, personal computers, smartphones, etc.) into the next, see his earlier articles Tim Cook, Apple and wearable computing:

Will Tim Cook Be the Next Steve Ballmer?

Will Wearable Computing Be Tim Cook’s Rubicon or Waterloo?

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