Best Buy Enters the Media/Telecom Services Market
Best Buy (NYSE:BBY) is the largest specialty retailer of consumer electronics in the U.S. It enjoys a market share of more than 22% in the US consumer electronics market, competing primarily with Wal-Mart (NYSE:WMT) and RadioShack (NYSE:RSH).
In addition to consumer electronics, Best Buy increasingly sells media and telecom services. By partnering with Sonic Solutions to sell movie downloads, and with Sprint to offer mobile broadband, Best Buy signaled its ambition to control the entire consumer electronics chain. Below we discuss possible motives behind Best Buy’s expansion into consumer electronics services.
Expansion into Services Can Boost Best Buy’s Gross Margins
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Best Buy recently launched a digital-movie download service called “CinemaNow.” The company has started selling e-books through its website. And it plans to launch a new store format that will prominently feature home broadband and mobile broadband service offerings along with Internet-ready TVs. With sufficient consumer adoption, these services can all generate higher margins for Best Buy compared to hardware sales.
You can modify our forecast above to see how an improvement in gross margins for Best Buy’s US stores can impact its stock.
Opportunity to Tap into Fast-Growing Mobile Broadband Subscriber Base
The number of mobile broadband subscribers in the US will increase from 6.5 million in 2009 to around 30.2 million in 2014, according to a forecast by the market research firm IDC. This represents an average annual growth rate of more than 35% and a four-fold increase over a span of five years.
Mobile computing devices like tablets and netbooks have boosted demand for mobile broadband, supported by vast range of mobile plans as well as improving network speeds. Sprint has partnered with Best Buy to offer its 3G network on Best Buy’s new mobile broadband service. Best Buy is also looking for opportunities where it can expand its service to 4G networks like WiMax that promise much higher speeds.
Competitive Pricing as Important as Customer Convenience
Best Buy aspires to become a one-stop shop where consumers can buy not only electronic products but also services that add value to these products. These product-service combinations provide convenience for consumers. But customers are looking for good deals as well as convenience. The company’s current broadband/mobile phone plans are comparable to those provided by AT&T (NYSE:T) and Verizon (NYSE:VZ).
One disadvantage: negative perception of Sprint’s network among US consumers could hinder Best Buy’s mobile broadband service plans.
You can see the complete $42.03 Trefis price estimate for Best Buy’s stock here