Why Best Buy and Microsoft Are Teaming Up

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Microsoft (MSFT) has announced that it will be partnering with Best Buy (BBY) to open 500 Windows Store locations inside Best Buy stores across the country.

The move could help both brands, which are struggling against changing business realities. Microsoft was late to the game on tablets and smartphones, and its offerings -- the Surface and the Windows Phone, respectively -- have struggled to win over consumers. More concerning is its latest operating system, Windows 8, which overhauled the user experience but is now being blamed for a downturn in PC sales.

Meanwhile, Best Buy is fighting off price competition from online competitors and dealing with a changing consumer electronics market in which people no longer seem all that interested in buying televisions.

So is this a case of tying two rocks together and hoping they'll float? Not quite. There are a few reasons why this deal might make sense for both parties.

1. It minimizes real estate costs for Microsoft. Microsoft has already made its first foray into retail with its Microsoft Stores -- shops, kiosks and and pop-ups mainly dedicated to Surface tablets. The Windows Stores it has planned for Best Buy will expand that model to include PCs from its original equipment manufacturer partners. The store-within-store format inside Best Buy will help Microsoft get its brand seen by electronics shoppers without having to make a big investment and sign a 10-year lease for a proper storefront.

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2. It gives Best Buy something to do with its excess floor space. Here's the problem with HDTVs: Pretty much everyone has them at this point, and electronics manufacturers have been unable to identify the next big thing in televisions that will get people buying again. 3D TVs have been largely ignored -- see ESPN's decision to shutter ESPN 3D earlier this week -- and the industry has had trouble convincing consumers to buy pricey, "ultra-high-resolution" 4K TVs.

This doesn't bode well for Best Buy, which built a bunch of huge stores to fill with TVs and now finds a buying public that's more interested in phones and tablets. The solution is to sublet some of that empty floorspace to brands that could use it, which it's already done for Samsung and Apple (AAPL). Continuing that strategy with Microsoft lets the retailer actually do something about its untenable real estate position without closing down its stores.

3. It improves customer service. Best Buy is attempting to compete on price by offering to price-match online competitors like Amazon (AMZN) and NewEgg, but customer service is where it's really trying to best e-commerce.

Forrester analyst J.P. Gowender writes that the Microsoft stores will effectively replace the PC department at your local Best Buy, and Best Buy will have Microsoft-trained employees selling the computers. Assuming these specialists are more knowledgeable about PCs and Windows than the usual Best Buy blue shirts, that means Best Buy will get to provide a better customer experience and Microsoft will get to put its best foot forward.

That doesn't mean this deal is necessarily going to save Best Buy and Microsoft. But it's a step in the right direction for both companies.

Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at Matt.Brownell@teamaol.com, and follow him on Twitter at @Brownellorama.
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