Best Buy to Sell iPhones: The Symbiosis Grows

Best Buy (BBY) will start selling Apple’s iPhone in its stores and the relationship between the two parties has become quite symbiotic. For Apple (AAPL), Best Buy is a great distribution channel–Apple Stores are typically located in metropolitan areas and consumers may not stumble on an AT&T (T) store. Meanwhile, Apple is just solidifying an existing Mac distribution partnership with Best Buy by adding the iPhone. - The iPhone will be sold at Best Buy Mobile, which has been rolled out to its 970 stores. Best Buy sells Macs at 600 stores.

But the real story here is from the Best Buy side of the equation. Best Buy is under assault on multiple fronts. Consumer spending is slowing and discounters–Walmart (WMT), Target (TGT) and Costco (COST) are increasingly selling electronics. Best Buy’s previous defense against the discounters was to offer in-home services (Geek Squad, home theater installations), but Citi analyst Kate McShane expects Walmart and Target to offer similar services soon.

In a research note Monday, McShane wrote:

We are concerned that discounters such as Walmart and Target will now be offering services to its customers, once a competitive advantage of Best Buy. We think in a difficult macro environment consumers will be enticed by this and Best Buy could lose some share. A mere 10 bps change in share in either direction impacts Best Buy EPS by ~$0.07.

If other retailers start offering services Best Buy, which has a model fueled by add-on items like installation and repair, could take a hit.

Enter Apple. Apple CEO Steve Jobs isn’t going to shack up with just any retailer because it could dilute the brand. That fact gives Best Buy some exclusivity. By selling the iPhone Best Buy will attract more foot traffic as curious consumers eye the iPhone. I’m sure folks will buy a few from Best Buy, but they may also wander around the store to buy something else.

Increasingly, Best Buy needs to keep moving as discounters take aim at the company. Apple may turn out to be Best Buy’s best defense. McShane adds:

Best Buy has been successful at taking significant share in the home theater and computer categories recently most likely because of BBY’s acquisition of Magnolia in home theater and its relationship with Apple in computing, which allows differentiation through service and a deeper product offering.

Indeed, Best Buy has already received an Apple bump as it boosts its PC sales market share. Here’s a chart via Citi:

Best Buy is obviously hoping to get an iPhone bump and grab more share.

Comments

[Murphy Mac:]

You have to assume this is the news that drove the recent stock bump upwards. Where are the people who busted Martha Stewart? It would be nice if stocks moved when the news was made public and not two days earlier.

2008 Aug 13 11:59 AM

[Murphy Mac:]

You have to assume this is the news that drove the recent stock bump upwards. Where are the people who busted Martha Stewart? It would be nice if stocks moved when the news was made public and not two days earlier.

2008 Aug 13 11:59 AM

[brewer:]

Stock moved on the news of 60 MILLION apps downloaded in one month. Best Buy ins't big news, but it will help. The local store by me had a Mac paired with an Instinct. Of course, for many years they only sold PCs. That was sad, so I'm glad they will have the real deals now, and not just the rip-off, derivative stuff.

2008 Aug 13 05:04 PM

[JosephKr:]

Well, I predicted that Apple's stock would close first at $180 by Monday and subsequently by today. It hit $180 in the mid-afternoon today and then retreated but still closed strongly.
Now let's look at the possibility of Best Buy numbers:
If Best Buy just rolls the iPhone into the existing 970 US stores (they have another 400 or so elsewhere), and sels only 10 per week per store, then for the remaining 18 or so weeks between Sept 1 and the end of the year, that's another mere 174,600 phones. At a subsidy of only $350 per phone (go the low side on this), that's a mere $61,110,000 added to Apple's bottom line.
Now, does anyone in their right mind expect Best Buy to average only 10 phones per store per week?!
Let;s try more like 10 phones per store per DAY.
That turns the cash into $414,190,000 for Apple's bottom line.
So now you see why this move makes eminent sense. And those numbers only take into account the September to December period, including (let's not forget), the holiday selling season!
So now you know what to expect just from that little move.
So....do you think the stock is going to sit at $179 and change for long?

2008 Aug 14 12:18 AM

[JosephKr:]

Oh yes, forgot: those 60 million apps will turn into 300 million plus apps by the end of the year, if not more.
This is like a juggernaut that just knows no limits and keeps getting stronger and stronger and stronger......

2008 Aug 14 12:20 AM

[mollytjm:]

my local Best Buy also has an Apple tech guy who use to be the only good tech person at the (now gone) compusa store. i asked him if they were hiring others and he said yes, that Apple's partnership with Best Buy included this demand, that they had to have Apple tech people on site, full time. this guy is not the usual store clerk..he's very savvy and apple customers really liked him. compusa's mistake was not having any other Apple person on site, when this guy wasn't there. Best Buy probably isn't going to make the same mistake.
so Apple people will go to Best Buy once they learn that they have real tech support there and Best Buy will, of course, benefit. While in the store just to check out the new Apple section, my friend and i spent over $100 on OTHER STUFF, half of which we hadn't planned to buy when we went there. I'm sure this will be repeated over and over again.

2008 Aug 14 10:39 AM