Microsoft shop takes on real retail world

Internet wisdom dictates that traditional retail better get online or lose precious market share to virtual competitors. Indeed, in the US, large book stores such as Barnes & Noble have lost considerable market share to Web-based rivals such as Amazon.com. Now, it seems, Internet companies are likely to take the next logical step and move from cyberspace to the main street, shopping centre or town mall.

In downtown San Francisco, the playground of Silicon Valley, Microsoft has teamed up with Sony to create the world's first Microsoft shop. It's situated in the Sony Metreon Center - a veritable temple to technology that houses iMax cinemas, video games arcades, and assorted Sony stores sporting every computerised gizmo and gadget that one can imagine. But it's a new departure for Microsoft, which until recently, sold goods through its retail partners or over the Internet.

Now, despite its staggering market share, Microsoft has an increasingly common problem in the Internet age. How can it physically demonstrate products in a virtual world? "When people buy software they either buy it bundled with the computer or they make a special trip to the computer shop or online to get a software that they know they want," said Ms Lily Kanter, manager of Microsoft's retail store in San Francisco. "With microsoftsf we want to be able to show case products that customers don't know they want - that is - until they get a chance to see them."

Likewise Sony has opened Sony Style stores in New York, Berlin, Sydney and San Francisco, because it wanted to build a direct relationship with its customers. Significantly, both Sony and Microsoft are operating on what they call a "cost-recovery model", meaning that profit is not a consideration. Instead, their aim is to use ritzy shops in major metropolitan areas to promote their products and brands.

"We're hoping to break even but our objective is to establish a bricks-and-mortar presence to feature products that are being sold virtually," says Mr Harlan Bratcher, Sony vice-president of retail.

Indeed, many Internet retail operations are likely to leverage this so called "clicks-and-mortar" strategy using both Web and physical stores to build a market presence in the near future, according to Mr Shawn Milne, retail analyst with investment bank Hambrect and Quist. "I would not be surprised if some of the major online brands such as Amazon and Drugstore.com opened physical stores in the coming year."

Why? Because the cost of acquiring customers online has now exceeded that of acquiring real world customers. New retail portals often pay as much as $150 (€144) for each customer they get to buy a product on their site. Furthermore, many pay major online providers such as AOL as much as $10 million per year to be featured as a preferred Web commerce site.

"I believe the cost of acquiring real world customers is about $50 per person," said Mr Milne.

One Web business that has adopted the "clicks-and-mortar" strategy is Mr Gerald Stevens - which uses online, telephone and real-world stores to sell flowers. The company now has 200 stores but aims to build about 1,000 stores by 2005.

However, according to Mr Milne, like Microsoft and Sony it's unlikely that Web retail operations will be looking to use their physical stores to generate large profits in the near future. After all why should they?

Inflated share prices on the Nasdaq means that many of these companies are cash rich and investment poor. Once the first couple of hundred million is used to gobble up their online competitors the majority of the rest of the kitty goes towards getting eyeballs or bums on seats.

Instead, they may aim to buy say small retail locations in shopping centres such as the Stephen's Green Centre which will offer promotions to sign up customers. Later, in the next decade there won't be a distinction between the real world and the Internet, there will just be brands.

In the meantime, Microsoft's Ms Kanter says that the company has "no current" plans to build new Microsoft retails shops. "This is really an experiment," she said. "We don't want our resellers to think that we're cannibalising their market."

Still, microsoftsf, is a bizarre concept. It not only sells items that you would expect such as software, keyboards and PC games, but it also sells pens, mugs, paperweights, coats and coats. It's a kind of a tourist shop for geeks. What will they think of next?

Niall McKay can be reached at irish-times@niall.org