Best Buy Mobile Earning Handset Margins and Carrier Compensation

Implications: Best Buy Mobile could face a challenge to consistently earn both handset margins and carrier compensation from competing device manufacturers and wireless providers.

Analysis:

Best Buy’s focus on wireless with the new unit of Best Buy Mobile is trying to capture exclusive offers, and still promote multiple brands of carriers and devices.  Best Buy hopes to earn both handset margins and carrier commissions.  Because of handset subsidies by carriers in the U.S. market, the wireless distribution model has been agents that primarily earn activation commissions from the carriers.  Depending on whether the agent is exclusive or non-exclusive, there are other incentives such as residuals for the net growth of the agent’s subscriber base, participation in co-op advertising, and site location funding. 

Best Buy gained the exclusive on the Samsung Instinct model from Sprint Nextel despite selling the key competitors of AT&T and Verizon.  With the start of selling the iPhone, Best Buy gets the third-party exclusive outside of Apple and AT&T company-owned stores.  However, does AT&T want Best Buy to acquire new subscribers and pay an activation commission in which there is already a significant subsidy cost?  Or will AT&T strongly advertise for new subscribers to come to AT&T company-owned stores to save the activation commission?  On the other hand, the iPhone pricing of $399-$499 for existing upgrade customers and $599-$699 for non-contract subscribers has the potential for handset margins.  But Best Buy will be foregoing the new customer activation commissions and not improving its subscriber base count for residual compensation. 

In announcing the iPhone’s availability, Best Buy pointed out that higher-end smartphone sales had increased tenfold in the past year.   The studies of Synergy Research show that smartphone are 12.2% of total handsets sold in the U.S. during the first half of 2008.  The percentage is up from 10% in the first half of 2007, but indicates that Best Buy Mobile cannot depend on smartphone sales for the majority of its mobile business.  Best Buy’s new mobile store-within-the-store will accommodate the economic slowdown with more traffic and replace electronics shelf space with the more essential wireless devices and accessories.  And the 50% investment in Carphone Warehouse’s 2400 stores across nine countries can be leveraged to enter the European electronics market.  For the U.S. market, Best Buy will be trading off handset margins and carrier compensation depending on the relationship of device OEMs and carriers.