How Big Of A Threat Is Amazon's Installation Service To Best Buy's Geek Squad?

Summary

• The e-commerce giant now sends technicians to set up smart homes.
• Best Buy, however, already has an established presence all over the country.
• Amazon won't up-end Geek Squad anytime soon, as Amazon's scope is limited.

There's no denying the addition of its Geek Squad back in 2002 helped keep electronics retailer Best Buy (NYSE:BBY) a little more relevant than it had a right to be in the shadow of now-bigger rival Amazon.com (AMZN). Even so, with most consumers now more than self-sufficient when it comes to their technology and a myriad of installation options available, some observers have been questioning the value of Best Buy's in-house tech gurus.

As it turns out though, the guys and gals driving the orange and white vehicles around your neighborhood may be more relevant in the future than you think. How do you know? Because, unfortunately for fans of Best Buy's turnaround effort, Amazon is getting into the home-technology installation business. Recode reported today the e-commerce giant has launched smart-home installation services in seven different markets, with presumably more on the way.

Maybe it's not a deteriorating business after all.

Amazon's move does beg the question though... how much money is there in the tech-installation business. The answer is, more than you might think.

Look Out Geek Squad?

If it's news to you, don't worry about it. Amazon started the unit in low-key fashion, and had remained rather quiet about it.

That may not be the case for much longer though, with want-ads for qualified technicians recently popping up in another seven markets in addition to the seven already up and running. The company seems to have the initial startup kinks worked out.

As for what's exactly at stake in terms of revenue, nobody really knows for sure. Best Buy doesn't divulge the details of how big its Geek Squad business is. There are some good educated guesses floating around on the web though. Some have opined the arm drives about $2 billion worth of sales per year, while others have guessed on the order of $3 billion.

That's apt to be high-margin revenue too, sporting gross profit margins on the order of 40% to 50%.

For perspective, the retailer has generated $39.5 billion worth of sales over the course of the past four quarters, and only turned about 3% of that into net income.

In other words, Best Buy has good reason to worry, as the rise of Amazon's tech-service field agents is a decent-sized source of revenue, and an oversized source of profits in a consumer-electronics arena that's known for paper-thin profit margins.

It's difficult to say the launch of Amazon's smart-home specialists takes dead aim at Best Buy's Geek Squad though. The former focuses on getting Echo devices up and running and getting users comfortable with its digital assistant Alexa. The latter offers a little bit of everything from setting up flat-screen TVs to fixing computers.

No investor-oriented discussion of the news can ignore the nuances of each company's operation, however.

While Geek Squad itself is a minor revenue source and a major profit source, it's also a key driver of product sales. A consumer or even a small business owner can step into a Best Buy store in need of a turn-key solution and walk out of that store with the problem solved in. The computer or computers have been purchased, along with all the necessary networking equipment, and Geek Squad's people will be on the deployment site soon enough to complete the job. In addition to a business in and of itself, Geek Squad (along with Best Buy's in-store technicians and service departments) are also a sales tool, helping promote computers, routers, cameras, thermostats, etc.

That was always by design, by the way. As Best Buy CEO Hubert Joly explained a year ago:

“Technology continues to innovate. But there is a growing gap between what the technology can do and our ability to understand it. And that can be overwhelming... The best place to have these conversations is inside your home. It doesn't need to be a big problem, but we want to build a relationship over time. So if you want help with not just an individual product but a whole system, of if you want ongoing maintenance, we can do that.”

Joly didn't say it in words, but was largely talking about the looming embrace of the Internet of Things and smart homes.

And that's where Best Buy has an edge on Amazon's new movement. Consumers will have to have a complete understanding of smart-homes and have already made a specific purchase decision before Amazon's technicians are tapped, and that's a big leap for more consumers. Conversely, consumers don't have to know anything or made any decisions to benefit from Best Buy's associates or Geek Squad's staff.

There's also the not-so-small matter of geography. Amazon's installation staff are only covering seven markets right now, but 70% of U.S. residents are 15 minutes or less away from a Best Buy store. Being there now, first, is a key part of keeping Amazon's ambitions in check.

Still, seeds have been planted. As consumers continue to become more tech-savvy, the need for in-store guidance wanes, making Best Buy less necessary and Amazon's services more marketable... at least on the smart-home front.

To that end, Amazon clearly isn't afraid to branch out, recently announcing its entry into the grocery game via an acquisition of Whole Foods Market (WFM), while simultaneously deepening its cloud computing business. Expanding its in-home installation service to other things like TVs and other tech-repairs would be a relatively small leap for the organization.

Bottom Line

BBY shares were understandably down 6% in response to Recode's report, and the knee-jerk reaction makes a certain amount of superficial sense. When all is weighed though, Amazon is miles and years away from disrupting the existing tech-installation market. Best Buy remains the top name in that business, and will for a long while. Indeed, the launch of Amazon's rival service could prompt Best Buy to improve its overall game, making it even easier for buyers to come to the retailer for holistic solutions.

Of course, just because Best Buy doesn't have a whole lot to worry about from Amazon in the home-installation market doesn't mean it's not got a myriad of other hurdles to clear.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.