April 23, 2018 • Volume 12
Has Best Buy let the fox into the henhouse?
Best Buy and Amazon announced an interesting [and complicated] deal last week wherein Best Buy agreed to carry smart TVs from Toshiba and Insignia (Best Buy’s private label brand) loaded with Amazon’s Fire TV operating system. The brands will be sold in its brick and mortar stores and exclusively in a Best Buy storefront on Amazon.com. Best Buy’s Insignia smart TVs had been powered by Roku previously, and the news of this deal sent Roku’s shares down 9 percent.
This deal is clearly a good one for Amazon. It gains floor space to showcase Fire TVs in Best Buy’s 1,000 stores, with support from Best Buy’s sales associates. It is unclear whether Amazon will sell other smart TVs on Amazon.com powered by Fire TV or if Best Buy has exclusivity.
The “best” of both worlds
From Best Buy’s perspective, there are some risks, but the plusses seem to outweigh the minuses. Best Buy is still able to offer Roku powered TVs in-store, as well as Fire TV powered sets. The deal component I particularly like is the fact that Best Buy has exclusivity on these sets on Amazon.com, so that if shoppers showroom – look at the products in store but buy online - Best Buy still gets the sale.
The downside, though, isn’t insignificant. Best Buy is enabling its biggest competitor to overcome its biggest deficit, an inability to allow potential buyers to physically evaluate a product that is very much driven by points of physical evaluation: How does the picture look? How does the operating system work? How well does the voice control work?
Best Buy is betting that by doing deals like this it might make it less likely that Amazon will feel that it needs to make a big acquisition to allow it to showcase its electronics products. In the short term, that seems like a safe bet, as digestion of Whole Foods has given Amazon some heartburn. But in the longer term we’ll have to see. Amazon’s last acquisition was basically free, as its value increased enough in one day more than the price of the acquisition. This must lead Amazon to believe that Wall Street would foot the bill for its next acquisition.
Let’s look at the broader implications of this deal.
First, this may tip Amazon’s hand a bit: Amazon is both a retailer and a product manufacturer. The retail side of its business has been tough to run profitably, while it has had some big hits as a manufacturer (Kindle, Fire TV, Echo). Amazon’s apparent willingness to forgo retail margins in the interest of supporting its own emerging products [assuming that Amazon isn’t collecting seller fees from Best Buy, which is unclear] may be telling. Perhaps Amazon is starting to lean into its role as manufacturer a bit.
Second, this is a smart effort to capture the leakage of sales from retailers that invest in real estate, inventory, and staff to showcase products, only to find that shoppers will often make the purchase online, often at Amazon, after kicking the tires in-store. This model should get other retailers’ creative juices flowing.
Thirdly, this is a move with risks on Best Buy’s part that acknowledges and tries to manage the biggest inherent risk in its business, Amazon’s growing dominance of retail. It would be a heckuva lot easier to sell the status quo to the Board than this deal. Kudos to Best Buy CEO Hubert Joly and the Best Buy board for not taking the more conservative head-in-the sand approach that many retailers would’ve taken.
The loser in this deal seems to be Roku, which now has a much more formidable smart TV competitor in Amazon than it used to have. Roku and other manufacturers of high consideration goods that need to be physically evaluated (think apparel, electronics, home goods) should think hard about what they can do to prevent this sort of deal from happening again, or to them. And they are undoubtedly thinking about the virtues of growing their own direct-to-consumer businesses to take some of the bite out of these sorts of deals.
Finally, this deal is a perfect example of the business jujitsu that retailers and brands increasingly find themselves compelled to engage in. The business world, roiled by digital powerhouses with little regard for historical norms [like maximizing profits], is struggling to find its place in this new world. Best Buy seems to be one retailer that is figuring it out, at least for now.
The end of Quill v. North Dakota?
Last week, the U.S. Supreme Court took up South Dakota’s challenge to the 1992 Quill v. North Dakota decision that prohibited states and localities from collecting sales tax from merchants that didn’t have a physical presence in the state or locality where the buyer lives.
The Justices had a lot to say in just one hour of arguments. Justice Ginsberg, countering the argument that Congress should fix the problems wrought by Quill, argued that it isn’t Congress’ responsibility ‘to overturn our obsolete precedent’. Justice Alito, fearing that states ‘tottering on the edge of insolvency’ might look to balance their budgets on the backs of out of state businesses, revealed some might’ve benefitted from a cup of coffee, as it is the residents of those states, not the merchants, that pay sales tax.
It is high time that online retailers--which collectively generate about 10 percent of consumer sales of products --collect the money that consumers are supposed to be voluntarily surrendering when they file their taxes every year. Administering this will absolutely create a set of complicated problems for states and localities, and will create a boon for SAAS solution providers who will keep track of which products are taxable at what rates in each taxing jurisdiction.
When Quill was decided, e-commerce couldn’t have been foreseen, but catalogs had been around for a century. Quill was a Supreme cop-out, plain and simple. The Executive branch has no power on this issue without help from a Congress that is not going to approve anything that it considers a new tax. Not even Robert Mueller’s mandate is broad enough to address this. The sensible path here should be clear to SCOTUS: You broke it, you need to fix it.
Ken Cassar is vice president, principal analyst at Slice Intelligence, where he looks at trends in the e-commerce industry armed with Slice’s robust set of online sales data. Ken brings a rich online retail background to Slice Intelligence. Most recently, Ken was SVP, Media Analytic Solutions at Nielsen, where he developed several innovative digital commerce measurement and advertising effectiveness solutions. Prior to Nielsen, Ken was an analyst at Jupiter Research, where he was an early thought leader, trusted adviser, and media source on e-commerce. His prescient outlook on fledgling e-commerce industry was a key contributor to Jupiter’s dominance as a digital media zeitgeist at the dawn of the Internet. Ken has an MBA and Bachelors Degree in Political Science from the University of Connecticut. Ken aspires to stay technologically ahead of his teenage children, as evidenced by his ‘Gadget Geek’ Slice profile. He also has the appropriate jacket for every occasion.