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Apple Didn't Kill Best Buy

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Years from now, when fiscal forensics experts begin analyzing the chalked outline of Best Buy's (NYSE: BBY  ) remains, it'll be easy to see fingers pointing at Cupertino.

"Apple did it," the masses will accuse. It was Colonel Cook in the Library with the iPad!

But that's not entirely fair. Apple (NASDAQ: AAPL  ) definitely played a part in the demise of consumer-electronics retailing, but dusting the scene will uncover more than just the tech giant's fingerprints.

In the short term, we have BB&T Capital Markets analyst Anthony Chukumba, who upgraded Best Buy this week, boosting his firm's rating from "hold" to "buy" and introducing a $21 price target -- on the premise that the recent weakness in Apple will be a windfall for Best Buy.

I covered the upgrade earlier, and while I raised my doubts about the call, I didn't mention the biggest reason for Best Buy's grim fate, regardless of what happens to Apple.

The great digital divide
Is Chukumba right that the success of the Apple Store will eat into traditional catch-all superstores? Yes. Is he spot-on in assuming that chunkier margins are to be had for retailers as Android gains market share? Absolutely.

However, none of this means Best Buy will be around in five or 10 years. (NASDAQ: AMZN  ) may have exposed Best Buy's prices as too high, but it's not even the showrooming trend that will be the cause of death when the fiscal crime lab is through with this one. No, the biggest reason for Best Buy's fading relevance is that media distribution has gone digital.

It's not that Apple Stores are cooler. It's not that Amazon and other online retailers have the infrastructures in place to deliver lower prices than a physical storefront. Folks are just simply consuming video, music, and software directly into their devices, and that means that it will be curtains for Best Buy's CDs, DVDs, video games, books, and software.

Toxic sticker shock
These may be low-ticket items, but they're the reasons folks went to Best Buy more than just once or twice a year. Buy a fridge, and ideally you won't need one for another decade. Your TV or digital camera may not hold off their obsolescence as long, but you should still be good for a few years.

Media, though, lives on a different cycle of repeat purchases. Buy the new Lumineers CD, and you could still go back to Best Buy the following week to pick up Ted on Blu-ray. Buy the new George Sauders book, and you may still find your way back to the store to get Dead Space 3 when the video game hits the market on Tuesday.

Sure, you could. But we're cutting out the retail middleman these days. Zapping physical media into cyberspace is the reason store traffic is on a downward spiral at Best Buy.

It's true that Apple was the kingpin of this revolution. The iPod crushed CD sales, and it's not a coincidence that video game and movie sales began to falter when the iPhone and iPad were introduced. But the trend would continue even if Apple keeled over tomorrow. Android -- and whatever platform rises next -- will simply keep repeat customers away.

Do you really think that there's any turning back now?

You can blow down a house of bricks ...
Some models may crumble sooner than others.

GameStop (NYSE: GME  ) has revised its comps guidance lower four times over the past year as the push to digital dries up demand for its games and the supply of the used physical games that it dresses up for resale at chunky margins. Barnes & Noble (NYSE: BKS  ) has already announced that it will follow Blockbuster in closing far more stores in the near future than it would dare to open.

GameStop and Barnes & Noble have digital initiatives in place to try to offset some of the sting of the download revolution, but even if those attempts are enough -- and they won't be -- the physical store model is toast.

Why would Best Buy be any more fortunate? Sure, the company sells the devices that play digital media, but that's pretty much it. The content creators and digital marketplaces take over from there, and the hardware upgrades will largely fall into the arms of the carriers and access providers that make the connections possible.

Apple didn't kill Best Buy, and that's why Best Buy will continue to suffer. Showrooming didn't kill Best Buy, and that's why sales will continue to fall, even now as Amazon is collecting sales taxes in a growing number of states.

Digital killed the physical star.

Respect the crime scene, please.

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Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 02, 2013, at 3:38 PM, sammycooool wrote:

    More noteworthy is the news that BlackBerry is now killing Apple.

  • Report this Comment On February 02, 2013, at 4:04 PM, never2dull4u wrote:

    5 yrs ago, I predicted that Costco and Walmart will kill BBY.

    In the next two years, AAPL will kill Samsung once Apple is NO longer a key strategic partner of Samsung. What will Samsung do with all those excess capacity? There is NO other companies on earth that can replace Apple's dominance.

    The writing is on the wall....

    Go ahead, bloggers and Wall Street. Go cheer for Samsung. In two years, they will be a wounded mule. Can you say "write offs"?

  • Report this Comment On February 03, 2013, at 1:24 AM, julesbutz wrote:

    I am not a big Best Buy fan. Over the years I have purchased simple things there. Seemingly simple things, I assume. One thing, a car charger made of a wire, some type of transformer, and a couple of male ends broke within three months. This was replaced and the next one broke within three months. Hmmm....perhaps Best Buy's demise is as simple as a lack of oversight with regard to product quality. If one thing breaks in a consistent way, maybe everything I would want to buy there will do the same. In my opinion, this is a case of one rotten apple spoiling the bunch. Don't sell shoddy products and perhaps you can develop some customer loyalty. Peter Lynch advised, buy what you know, or in this case, don't buy what you know.

  • Report this Comment On February 03, 2013, at 7:53 AM, lrd555 wrote:

    Apple should build another 100 stores in the US. Thereby eliminating its dependency not only Best Buy, but Verizon & AT&T too. In doing so, Apple put a real hurting on the competition that depends on these outlets to compete with Apple. Basically, another 100 Apple stores would assure Apple the US market going forward.

    I'd gladly help Tim Cook execute this strategy over the next two years!

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