Can Microsoft retail succeed where others have failed?

Apple stands out as the big exception but the history of tech companies trying their hand at operating their own retail stores is grim.

Charles Cooper Former Executive Editor / News
Charles Cooper was an executive editor at CNET News. He has covered technology and business for more than 25 years, working at CBSNews.com, the Associated Press, Computer & Software News, Computer Shopper, PC Week, and ZDNet.
Charles Cooper
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Microsoft's retail foray
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Did Microsoft just serve up more fodder for the wits who direct Apple's lacerating series of Mac versus PC commercials?

On the surface, the decision to open a Microsoft chain of retail outlets sounds like a reasonable idea. With consumer spending plummeting, the competition for shoppers' attention is keener than ever. Why not hang out a shingle and give your wares top billing?

But this route has been fraught for technology companies who lost fortunes paying for under-used real estate compounded by bloated employee payrolls.

In the 1980s, IBM operated a network of retail stores. You could walk in and find out everything you wanted to know about IBM's products and services and do a deal on the spot. On paper, IBM believed it was a fine idea. In practice, however, it was an albatross. The stores were stuffy and had all the charm of hospital waiting rooms. What's more, you were limited to IBM products when snazzier stuff was sold by competing clone makers like Compaq or AST Research.

The stores lost hundreds of millions of dollars and IBM cut its losses in 1986 when it sold its leases to Nynex, which was one of the seven regional Bell operating companies. (Nynex also lost a fortune with the stores and wound up selling the entire kit and caboodle to ComputerLand five years later.)

CompuAdd, which started off selling its computers direct to customers, had a nice business going in the late 1980s and part of the 1990s. But its ambitions widened, and management decided to open a string of CompuAdd-only stores. By 1996, the company was bankrupt.

"Hey, wanna check out that cool Microsoft store down the block?"

Another direct seller, Gateway, also stumbled badly after opening retail outlets in 1996. At one point, the company's coast-to-coast retail presence numbered 326 stores. But this, too, ended in failure and Gateway shut all of its outlets in 2004.

So far, the exception to all this has been Apple. In 2001, the company opened its first stores in high-rent locations like New York, Chicago, and Palo Alto, Calif., and they did it right in the middle of the dot-com meltdown. Anybody who knew anything about retail was skeptical, not the least because Apple was wading into an entirely new market that had a rightful reputation for being a snake pit.

The gambit has worked beyond most expectations. In fact, roughly half of Apple's 32,000 person workforce is employed in the company's 251 retail operations around the world. The stores have served as a terrifically effective venue for attracting new customers. Management is fond of repeating in various forums that more people visit an Apple outlet in a given week then attended the Macworld conference.

"Who says we're not cool?"

But not even Apple is immune to the economy. During the company's fiscal first quarter, average revenue per store declined 18 percent, from $8.5 million last year to $7 million this year. Still, the company's outlets are operating comfortably in the black.

Watching all this from the sidelines, Microsoft finally decided to try its hand, despite this being what is arguably the worst economy since the Great Depression. Maybe this is the right time. They say there is always opportunity in periods of distress, and Microsoft has deeper pockets than most. The company has hired a Wal-Mart veteran named David Porter to direct its retail strategy and that's an encouraging harbinger. After all, when you're talking about retail, few match the success enjoyed by Wal-Mart.

Microsoft will need his expertise to smooth over the channel conflict that inevitably will crop up. Porter will also face another challenge he did not encounter at Wal-Mart. This is not the same as selling toothpaste or deodorant. Smart merchandising only goes so far when it comes to selling technology products. If you don't have the goods, all the advertising in the world won't be enough to compensate.

Maybe Microsoft's future retail network will get a boost from the debut of Windows 7 along with new and improved Zunes. But retail is about buzz, and if Microsoft can't burnish a reputation as an inventor of cool technology, Justin Long and John Hodgman, the actors in Apple's tongue-in-cheek Mac versus PC spots, may wind up with lifelong employment.