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Micron to set up shop in Best Buy stores

The direct seller of PCs cuts a deal that will put Micron sales kiosks in 357 of the retail chain's stores, giving the PC maker some footing against competitors that have similar arrangements.

Micron Electronics today cut a deal that will put PC ordering kiosks in 357 Best Buy stores, a move into a fiercely competitive segment of computer sales.

The agreement gives the Nampa, Idaho-based PC maker some footing against competitors such as Compaq Computer, Gateway and IBM, which have similar arrangements with other retailers. But Micron also is moving into a highly competitive space, where rivals are entrenched and sell significantly more PCs through retailers.

Micron also has shifted away from hardware-only sales to a subscription computing strategy, where customers pay a monthly fee for systems and Internet services and connectivity. The strategy, which mimics the model used by cellular phone providers, uses hardware more as a means of selling services than making profits off PCs. Joel Kocher

"This optimizes the best of both the direct model and the retail model," said Micron chief executive Joel Kocher. Kocher, who described the kiosk operation as "a configure-to-order, no inventory program," emphasized the importance of having a physical presence in 39 states.

Micron, which sells PCs direct to customers, has no plans to offer systems in stores. Rather, customers will place orders at interactive kiosks, and PCs will be built and shipped directly from Micron.

"This is a pretty decent answer to Gateway Country Stores," said International Data Corp. analyst Roger Kay. "It gives Micron a lot of leverage quickly for getting direct (sales)...into a retail environment without having to carry all the real estate."

Kay warned the timing is crucial for Micron, which in its fourth quarter of fiscal 1999 saw its PC market share decline to 1.2 percent from about 1.6 percent a quarter earlier.

The kiosks will be available in a select number of Best Buy stores starting tomorrow, with plans to expand to all locations by mid-spring.

The arrangement with Minneapolis-based Best Buy could help bolster the PC maker's consumer sales, which fell 61 percent in Micron's fourth fiscal 1999 quarter, compared to a year earlier. During the same period, sales to commercial and government markets increased to 72 percent of Micron's business, according to Technology Business Research.

In the fourth quarter, government was Micron's biggest market at 41 percent, up from about 26 percent two years earlier, followed by 31 percent commercial, 24 percent consumer and small business and 4 percent international.

"It's a retrenching of their strategy," said TBR analyst Lindy Lesperance. "Micron had been running away from the consumer market, where they could focus on services to boost margins. This is a retargeting on their consumer market, which at one time had been their key market."

"We're definitely going for the consumer market," Kocher said. "This gives us the largest retail footprint in the United States and gives us more access to customer opportunities than we ever had going direct."

Micron faces a crowded field of competitors--both direct and indirect--offering build-to-order PCs for retail.

Micron follows Gateway, which also sells direct, to retail. OfficeMax last month agreed to put Gateway "stores-within-a-store" in more than 1,000 retail outlets. The agreement follows the San Diego-based PC maker's success with its own retail operation, the Gateway Country Store. Neither operation sells PCs on site; customers place orders for systems that are later shipped directly from Gateway.

"This underlies a key trend, where it is a less risky business for retailers making less margin on a kiosk sale than loosing money on inventory sitting on the shelf," Lesperance said. "These deals between the online click vendors and brick-and-mortar retailers are going to increase as PC prices come down and margins get squished further."

IBM also has a store-within-in-a-store arrangement with OfficeMax, but in a smaller number of locations. The Armonk, N.Y.-based computer maker also largely pulled out of retail, making it much less of a retail competitive threat.

As IBM exited retail, Hewlett-Packard filled in the vacuum, quickly gaining market share and closing in on sales leader Compaq. In January, HP continued to close the gap on Compaq in terms of retail sales, with 32 percent vs. 34 percent, according to PC Data. Emachines and Apple followed, with 12.9 percent and 10.9 percent market share, respectively.

Houston-based Compaq casts a wide net at retail, either on store shelves or with build-to-order kiosks. Compaq has 9,000 interactive kiosks--at CompUSA, Radio Shack and Staples, among other retailers--where customers place orders for computers built to their specifications and shipped direct from Compaq.

Compaq benefits from offering PCs on a cash-and-carry as well as a built-to-order basis, making it a formidable opponent to any direct competitor moving into retail.

Signs something was afoot could be seen for weeks. Micron's stock jumped 80 percent this month, with some financial analysts speculating the PC maker would spin off its Web-hosting operation.

Micron plans some advertising to support the program, but most will come through the approximately 75 million ad circulars Best Buy distributes each month.