Friday, November 22, 2013

Best Buy Can Have A Dominant Role in Electronics

The almost universal assumption is that consumer electronics are a commoditized products that can be sold anywhere, from drugstores to specialty superstores.  Therefore, it follows, says the universal consensus, that players like Walmart and Amazon should dominate consumer electronics sales, because of their purchasing power, scale efficiencies, and convenience.  Products that fit this paradigm perfectly include VCR-DVD players, MP3 players, and even smaller flat screen displays.

Apple of course has pioneered its own approach.  It develops tightly integrated electronics with a proprietary operating system packaged with stylish, uniquely identifiable design.  They have carefully nurtured a worldwide consumer brand.  Their products are manufactured through a small, tightly controlled network of suppliers, protected by a large patent portfolio.  Their margins are enormous, and although their market share for smartphones may have peaked, their profits and profit margins continue to be nonpareil in the industry.

Smartphones are likely to become ubiquitous, but at least at the upper end, they may not become commodities along the historical lines of the VCR. VCR components were all the same--read/write heads, laser readers, rollers, generic circuit boards, power supplies, and a metal cabinet--and there was nothing around which to build a distinct brand.  Westinghouse units sold in a drugstore were equal to JVC units sold in a specialty store, and prices eventually collapsed. Smartphones offer the same of opportunities for design, innovation and technical integration that can make brands, like Samsung, stand out from Google/Nexus, for example.

Right now, we appear to be heading in a different direction.  Think about a $129 smoke detector for the "connected home."  This would replace a $12 unit available at a drugstore, hardware store, discount retailer, or a retailer like Home Depot.  Who on earth would make this trade?  Never mind that the initial setup is complicated and that a newspaper reporter couldn't hook up with her home wireless network.  She took out her $12 unit and tossed it out!  Nest is establishing a brand; after all, their founders came from Apple.  A smoke detector was the ultimate commodity, but it could become something else.

The more complicated the palette of consumer choice becomes for electronics--and it is inevitable that it will--the more the opportunity opens for brick and mortar retailers like Best Buy to dominate significant segments of the consumer electronics markets, broadly defined.

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