Best Buy missing in cloud frenzy

  • Article by: THOMAS LEE , Star Tribune
  • Updated: May 12, 2012 - 2:46 PM

Experts say cloud technology can help the Richfield-based company boost revenue as shoppers turn to mobile devices.

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Shoppers head to and from the Best Buy in Richfield, MN, Thursday, March 28, 2012.

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Best Buy Co. Inc.'s head is not in the cloud.

The consumer electronics retailer has been a virtual no-show in cloud-based computing, an increasingly popular technology that allows consumers to store digital content like music, photos and movies on remote servers. Consumers can then access and transmit the data across multiple devices like laptops, smartphones and tablets.

Apple Inc., Microsoft Corp. and Amazon.com offer such services. And in March, Wal-Mart Stores Inc. introduced its "disc to digital" service, in which consumers can bring their DVDs to a Wal-Mart store, where employees store the movies into the cloud.

Cloud services represent the future of consumer digital technology, analysts say, a tremendous opportunity for the nation's largest consumer electronics dealer.

"These new technologies are difficult to understand," said Jonathan Gaw, a technology analyst with IDC. "Consumers need someone like Best Buy to show them [the way]."

Facing eroding market share and sales, Best Buy has been preaching about the need to integrate its digital operations with its physical stores and offer more profitable services instead of just selling discounted TVs and computers. The company already enjoys a highly recognizable tech support brand in Geek Squad.

So why hasn't Best Buy embraced the cloud?

"I think that's a major question," said Laura Kennedy, a retail analyst with Kantar Retail consumer research firm in Massachusetts. "Best Buy has some solid multichannel capabilities. But they haven't taken it to the next level."

The company did not respond to requests for comment.

For brick-and-mortar retailers, cloud technology can help offset declines in DVDs and CDs by encouraging consumers to purchase more digital movies and music. It also can help Best Buy, which prides itself at helping people navigate new technologies, remain relevant to consumers as more shoppers flock to the Internet.

Over the past year, Best Buy has shown some signs that it may integrate cloud technology into its business model. Last year, Best Buy acquired MindShift Technologies for $175 million. The company, based in Waltham, Mass., provides information technology expertise, including cloud services, to small businesses. And Best Buy recently hired former Starbucks Chief Information Officer Stephen Gillett to run the company's worldwide digital operations.

Analysts say cloud services could help Best Buy confront the decline of personal computers. One of Best Buy's core businesses -- sales of desktops and laptops -- has been slipping as consumers embrace mobile devices like Apple's iPad and Amazon's Kindle.

One reason for PCs' decline: Consumers are storing their data on cloud servers instead of the more limited memory chips on their home computers. Technology consulting and research firm Gartner Inc. predicts the cloud will replace computers "at the center of users' digital lives" by 2014.

"Emerging cloud services will become the glue that connects the web of devices that users choose to access during the different aspects of their daily lives," said Steve Kleynhans, Gartner's vice president of research.

The technology also could encourage consumers to purchase more online movies and music, analysts say.

Best Buy, in particular, has struggled to sell digital content over the Internet. In 2009, the company teamed up with Roxio CinemaNow to stream movies to any device sold by Best Buy that connects to the Internet. But the service has not gained much traction, and Best Buy rarely mentions it.

And last year, Best Buy sold Napster, its online music service, to Rhapsody for an undisclosed sum. Industry observers at the time estimated Napster had fewer than 400,000 subscribers, far fewer than the 706,000 subscribers in 2008 when Best Buy acquired the music service for $121 million.

By that time, "Napster lost a lot of the cachet it once held," Kennedy of Kantar Retail said. "I bet a lot of people didn't know it still existed."

In fiscal 2012, Best Buy said sales of games, music and movies at stores open for at least a year fell 16.3 percent. A cloud service could help Best Buy improve those numbers, analysts say. By 2015, consumers will spend $2.8 trillion worldwide on connected devices, the services that run them, and content that is transferred between them, according to a Gartner report.

"As cloud services become part of people's lives, device vendors [such as Best Buy] must integrate cloud services in order to win customers in 2012 or risk being displaced by those that offer these services," Andrew Johnson, a Gartner managing vice president, recently told a tech conference in Singapore.

Kim Garretson, a former Best Buy official who served as the company's liaison to venture capitalists, said retailers must generate more revenue from existing customers by doing more than "sell things that come in a box."

"It's something that retailers should be exploring, post-purchase services," said Garretson, a partner at Minneapolis-based retail tech consulting firm Ovative/Group.

Wal-Mart's disc-to-digital service, for example, will push people back to the stores, Garretson said. "People are not going to rush in and leave their DVDs" without buying something else, he noted.

But the cloud doesn't appear to be one of Best Buy's top priorities. The retailer has been struggling to grow store sales as it loses market share to competitors like Wal-Mart and Amazon. Best Buy also is looking for a new CEO after Brian Dunn abruptly resigned last month. The board of directors is investigating allegations that Dunn used company resources to support an inappropriate relationship with a female subordinate.

Earlier this year, Best Buy announced a plan to cut $800 million in costs over the next three years (mostly through closing big-box stores) and reinvest the money into Best Buy Mobile formats, expansion into China and experimenting with smaller-format "Connected Stores."

The company discussed a desire to boost e-commerce and service revenue, as well as sell more data plans to users of smartphones and tablets. But no specific mention of the cloud.

However, interim CEO G. "Mike" Mikan recently told employees he and other top managers were drawing up a new long-term growth plan.

And then there's Gillett.

At Starbucks, Gillett led the retailer's Digital Ventures business unit, where he oversaw the launch of the Starbucks Digital Network, a partnership with Yahoo that allowed store customers to access digital content on their laptops and mobile devices. Such content included free access to subscriptions at the Wall Street Journal and New York Times, exclusive iTunes music downloads and documentaries from Snag Films.

"Watch Stephen Gillett," Kennedy said. "He will be the one who's going to steer digital innovation to stores."

Thomas Lee • 612-673-4113

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