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Analyzing Amazon’s Best Buy

27 Aug, 2012 By: Stephanie Prange

The creative destruction that the Internet has wrought includes the spectacular fall of Best Buy.

While Amazon pushed lowball pricing, in most states boosted by a tax break, Best Buy unwittingly acted as a “showroom” for Amazon. Consumers could check out, test and make queries about products in Best Buy stores that they would ultimately buy on Amazon’s site at a lower price.

This sort of “showrooming” is not a profitable venture for Best Buy. The brick-and-mortar chain does all the work (renting real estate, displaying products, hiring workers, etc.) while Amazon gets the final sale, albeit at a lower margin.

Ultimately, it cannot continue.

Many analysts have been noting that Amazon might buy Best Buy. It seems an advantageous deal to me for both, but particularly for Best Buy. Instead of reaping no advantage whatsoever from lookiloo customers, the physical stores would become part of a retail ecosystem. Amazon’s “showroom” would be supported by the customers that actually buy from Amazon. Unfortunately, should this occur Amazon would lose one of its biggest advantages — drafting off of other retailers who have to charge sales taxes and absorb other costs that Amazon doesn’t.

This Amazon (Internet) advantage may have made sense in the beginning, but now it gives an unfair advantage to virtual retailers that brick-and-mortar retailers have no hope of combating.

I can’t help but draw a comparison to Netflix, which also benefited from the virtual world of movie rentals and movie streaming without having to build infrastructure. While Blockbuster had to maintain locations and pay clerks, Netflix used the existing infrastructure of the federal mail service to reach its customers. Once it collected the monetary advantage that afforded, Netflix drafted off of the bandwidth that others built for its streaming service.

It seems to me the best move is not to buy or own anything concrete, but to take advantage of the brick-and-mortar investments of others. Eventually, however, there may be few actual retailers to act as showrooms for the virtual ones.

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