In Depth December 10, 2009, 5:00PM EST

Why Tech Bows to Best Buy

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As the retailer began lining up approvals in the test markets of California and Oregon to be licensed as motorcycle dealerships, Dunn sent Bramscher a brief note over Twitter. "We're exercising muscles we didn't know we had," he wrote. Best Buy is now pushing to expand the availability of the Enertia to other states.

Dunn and his team, meanwhile, are working on a variety of similar deals. One key area is health and wellness. Earlier this month, the company launched new fitness zones in 40 stores across the nation that include devices such as a Bluetooth-enabled scale that sends weight information to a computer for charting. Next year the company will introduce a toothbrush that wirelessly reports to a PC the number of brushstrokes that a child uses. "We're scouring the world over, bringing in new talent to help us in a particular space," says Dunn.

The entrepreneurial spirit is filtering down to established businesses. Jason Bonfig, vice-president of the computing division at Best Buy, works closely with Toshiba and other PC makers to create notebooks under the Best Buy-exclusive Blue Label and Next Class brands. Based on customer feedback, the designs include perks such as backlit keyboards, bigger batteries, and custom chassis colors. It used to take weeks for color samples or material choices to make their way from Taiwan to the PC maker, then on to Bonfig in Minnesota. Fed up, Bonfig began joining the manufacturers on trips every six months to set road maps with their subcontractors.

BROADER FOOTPRINT

The cozier relations helped on the eve of the Oct. 22 Windows 7 launch, when HP offered to put together an exclusive bundle for Best Buy that included a desktop PC, monitor, laptop, netbook, and wireless router for $1,199.99. Best Buy also got the exclusive on Dell's sleek new $1,799 Adamo XPS notebook, in part because of its early involvement in the manufacturing process. "When you work closely together, there's more time to innovate elsewhere," Bonfig says.

Conflict still happens. Some top PC makers are upset about Best Buy's recent expansion of a service that lets customers reduce the amount of third-party software installed on new computers. Software companies pay HP, Dell, and others hundreds of millions of dollars a year to install trial versions of their programs for virus protection, photo-editing, and the like on new computers; PC makers get another check if buyers sign up to keep using them. Best Buy lets customers select just one antivirus program, say, and removes alternative products. The retailer's executives say they are simply responding to customer complaints that their new machines are overloaded and sluggish. But PC makers are concerned the retailer is trying to grab more of their scant profit pool.

They may be right. One unusual deal Best Buy has struck is with the antivirus company Kaspersky Lab. The Moscow-based company agreed to let Best Buy manage its software and subscription program in exchange for more prominent placement in stores, says Randy Drawas, Kaspersky's chief marketing officer. "We get a broader footprint within Best Buy and are seen as a premium brand," he says. Best Buy salesmen promote Kaspersky's software, and the retailer gets a slice of the revenues when customers use it. PC makers, though, may lose out on revenues as software from rivals such as McAfee are stripped off machines.

Although it is exerting more influence over the types of software installed on devices, Best Buy says it will continue to sell products from companies that opt out of its programs, such as the one aimed at reducing software clutter. That approach may help Best Buy skirt antitrust issues, even as its share of the U. S. consumer electronics market expands from the current 25%. "I hope we're not seen as picking winners and losers," says Dunn. "What we stand for is choice."

In another move, Bloomberg BusinessWeek has learned, Best Buy plans to launch its own advertising business early next year. The company will let movie studios, PC makers, and other companies run trailers, songs, or commercials on the thousands of televisions, PCs, and cell phones within its stores. Sony, Toshiba, and Samsung have already signed on to advertise. Still, the effort could prove controversial since rivals may end up advertising on each other's devices. Dunn won't reveal revenue projections but says the business will "grow into a big piece of what we do."

Dunn clearly relishes this kind of experimentation. As customers drop into stores around the globe this shopping season, they might run into kiosks where they can swap used games or movies, or DJ booths where would-be disc jockeys can pick up digital turntables, headphones, and lighting. Best Buy is testing out different logos and store layouts, even stocking solar panels in a few markets. Many of the tests won't pay off, but Dunn figures the retailer can learn and make adjustments for the future. "The easiest changes are when you are backed up against the corner and it's sort of 'change or perish,'" he says. "Now we're trying to change at a time when we are very, very successful."

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Geek Army

Best Buy says that its biggest not-so-secret weapon is the staff of 155,000 employees worldwide who can talk all things electronic. The company's BlueShirts do most of their work in stores. But the retailer is increasingly using social media Web sites such as Twitter and Facebook to bringing young, technologically savvy customers into its stores. More than 2,300 Best Buy staffers now provide customer service through Twitter.

To learn more about the initiative, go to http://bx.businessweek.com/best-buy/reference/

Edwards is a correspondent in BusinessWeek's Silicon Valley bureau.