business

The telecommunications industry is in a state of upheaval, with Internet companies scrambling for customers frustrated by traditional phone carriers.

So why is consumer electronics giant Best Buy Co. Inc. diving into this cutthroat market?

The answer lies in a fundamental shift in the way Best Buy thinks about its business. The Richfield-based retailer no longer wants to be known purely as a place to buy electronic gadgets. Rather, it also wants to sell higher-margin services to small businesses across the country.

Which explains why Best Buy just agreed to pay $97 million for Speakeasy Inc., one of the nation's largest providers of Internet phone services to small businesses. Speakeasy has 44,000 customers nationwide, including 10,000 small businesses that pay a flat fee to make phone calls.

The acquisition gives Best Buy a platform for cross-selling gadgets and computer troubleshooting services. "There's no question we're going to look for ways to integrate small-business telephony services with IT products [Best Buy] already provides," said Jeff Dudash, manager of brand public relations at Best Buy.

Speakeasy began as a funky Internet cafe in 1994 in Seattle, serving up Internet service along with espresso and live music. In 2001, a fire destroyed its cafe, and the company shifted its focus to its fast-growing broadband services. The company launched voice over Internet Protocol (VoIP) services in 2005 and quickly grew into one of the largest VoIP providers for small businesses in the United States. The company has 300 employees and last year generated $80 million in sales.

The deal should help Best Buy as it tries to insulate itself from plunging prices for big-screen TVs, which have fallen by 20 to 30 percent in the past year amid competition from Wal-Mart, Target and others. "Service margins are much higher than product margins," said Mike Binger, a portfolio manager at Thrivent Investment Management in Minneapolis. "This is a way for Best Buy to grow its service business without having to hire a ton of people and develop a lot of new products."

Best Buy has been expanding its services aggressively. Its Geek Squad computer troubleshooting service employs about 12,000 people nationwide, and Best Buy for Business -- a unit focused on providing services to small businesses -- has 1,350 specialists nationwide and plans to become as large as Geek Squad.

Speakeasy will operate as a subsidiary of Best Buy and deliver services through the Best Buy for Business unit. The transaction is expected to close next month.

Shares of Best Buy fell 55 cents Tuesday to $49.17 a share.

Chris Serres • 612-673-4308 • cserres@startribune.com