Back in 2001, consumer electronics retailer Best Buy (NYSE:BBY) made the kind of mistake that, in hindsight, appears almost unbelievable. Apple (NASDAQ:AAPL), led by Steve Jobs, was about to launch iTunes, the digital music store that would go on to revolutionize the way that people bought and listened to music, and the company needed a way to legitimize the service. The first iPod hadn't been introduced yet, and the idea of charging for music that was freely available on the Internet, albeit illegally, certainly didn't seem like a slam dunk at the time.
Jobs offered Best Buy an incredible deal. A former Best Buy executive described it as follows in a new book on Best Buy and big-box retailers from Thomas Lee of the San Francisco Chronicle:
He rang us up and said, 'I need distribution. I have got this thing called iTunes and I only want some cut of it. I don't want all of it, I'll give it to you, you can have iTunes.' We could use it in the stores. He would give us 50 percent of the revenue of each song and we did not have to pay for anything.
Best Buy rejected the offer, missing out on half of what would become the dominant force in music. In 2008, iTunes surpassed both Best Buy and Wal-Mart to become the largest music vendor in the United States, and by the beginning of 2013, a staggering 25 billion songs had been purchased through iTunes since its launch.
Why did Best Buy reject the iTunes deal? Because, according to the same former Best Buy executive, "they didn't understand it." Best Buy had succumbed to a culture which tends to creep into retailers as they become large and successful, one where a kind of "don't fix what's not broken" attitude prevents the company from adapting to trends before they become a problem. Best Buy viewed its suppliers as the enemy, attempting to extract as much savings as possible, instead of partners, and this stance caused Best Buy to miss out on a multi-billion dollar opportunity.
Better late than never
Until late 2012, Best Buy was still suffering from the same kind of culture issues that prevented it from working with Apple on iTunes. Retail had changed over the previous decade, with Amazon and online retail altering the way that people shopped for and bought products, and Best Buy had been left in the dust. The company's profits, which had been essentially stagnant for years, began to decline, and a scandal involving then-CEO Brian Dunn and an inappropriate relationship with an employee led to Dunn's exit. This was an opportunity to bring in a new CEO to shake things up, and Best Buy hit a home run with Hubert Joly.
Joly made a lot of changes at Best Buy, from slashing layers of bureaucracy to investing heavily in e-commerce. But one of the most important changes he made was redefining the relationship that Best Buy had with its suppliers. It took more than a decade, but Best Buy had finally learned an important lesson from the iTunes debacle. Suppliers and retailers need not be enemies, and a mutually beneficial partnership creates value for not only the supplier and the retailer, but the customer as well.
Samsung was the first company to seek a strategic partnership with Best Buy. By late 2012, Samsung had become a major player in the smart phone and tablet market, and the company was considering launching stand-alone Samsung stores in the United States, much like Apple had done with its Apple stores. But building out a considerable network of stores would have taken years, and with Samsung's main strength being making devices, not selling them, there were big risks involved.
Samsung co-CEO J.K. Shin decided on a different approach. He pitched the idea of building Samsung Experience shops, a store-within-a-store concept, inside Best Buy locations. Joly jumped on the idea, and within eight months of the deal being agreed upon, nearly all of Best Buy's U.S. stores contained a Samsung Experience shop.
This deal solved big problems for both Samsung and Best Buy. For Samsung, it allowed the company to rapidly build-out retail space for its products without the burden of building its own stores. It put Samsung's products in the hands of as many consumers as possible, something that online retail simply can't do, and it gave Samsung a direct link to the consumer.
For Best Buy, the enormous amount of floor space that was once occupied by things like CDs and DVDs could be replaced by more productive merchandise. With Samsung Experience shops being exclusive to Best Buy, the hope was that customers would be drawn into the store and purchase other products, with the ability to try out Samsung's devices providing an incentive to shop at Best Buy instead of online.
Since the Samsung deal, Best Buy has partnered with other companies as well. In 2013, Best Buy and Microsoft began building Microsoft mini-stores in Best Buy locations. This allowed Microsoft to give customers the ability to try out all of the devices running Windows and all of the services Microsoft offers, with knowledgeable staff trained by Microsoft able to assist customers with their purchase. For customers, especially those without a deep knowledge of technology, this type of partnership provides a real service.
Best Buy's turnaround effort has been making progress, and one of the most important drivers of this progress has been the change in culture introduced by Joly. Best Buy no longer views its supplier relationships as simply a way to cuts costs, but instead recognizes that partnering with companies like Samsung and Microsoft is beneficial for everyone involved. Best Buy missed out on an enormous opportunity when it passed on iTunes, and Joly has so far shown that the company won't make the same mistake again.
Timothy Green owns shares of Best Buy. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.