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Radio Shack Could Give Microsoft Bricks And Clicks


Cover Story -- The Microsoft Ruling

Radio Shack Could Give Microsoft Bricks -- and Clicks

The software king gets a retail platform to reach ordinary consumers offline and online

Microsoft Corp.'s new strategic alliance with Tandy Corp. (TAN), which calls for Microsoft to establish a "store within a store" in 7,000 Radio Shack locations, may give the beleaguered software giant just the image boost it sorely needs.

The spectacle of Microsoft (MSFT) joining hands with the friendly, convenient, but decidedly low-tech neighborhood Radio Shack could prove a perfect antidote to the bruising its image has taken since it was essentially judged a brute for anticompetitive practices. Radio Shacks are where, as Merrill Lynch describes it, a "tinkerer with a flair for electronics" can pick up phone cords and printer cartridges. It's hardly the terrain of Microsoft's past skirmishes in high-stakes operating system and Web browser wars.

The deal with Tandy "sort of brings Bill Gates back to his roots," notes Steve Harmon, chief executive of e-harmon.com, an Internet investment and research firm. "It harkens back to the early days of PCs when all the geeks who wanted to build their own machines hung out at Radio Shack and Gates and Paul Allen would go there to buy parts."SUBTLE MESSAGE. According to the terms of the five-year agreement announced on Nov. 11, Microsoft will roll out the new "store within a store" concept starting in the third quarter of 2000. There, customers will be able to experience the Internet and then sign up for dial-up or broadband access through MSN or WebTV. Microsoft will also invest $100 million in RadioShack.com to build up the newly launched e-commerce site.

In truth, Microsoft's deal with Tandy really has little to do with the antitrust case. Still, it sends a subtle message, notes Rose Papp, who holds Microsoft in four of the funds she co-manages at L. Roy Papp & Associates. For Tandy CEO Leonard Roberts to go ahead with the deal now, he must feel pretty safe that Microsoft will survive the legal action without being broken up or severely damaged. "Microsoft must have given him some sort of comfort level that it will be the same sort of partner in 10 years that it is today," Papp says, adding that she "remains very comfortable" holding Microsoft, despite the Justice Department case.

The primary purpose of the Tandy deal for Microsoft -- which promises to build out these stores within stores and share revenues on services it sells there with Tandy -- is as a way for Microsoft to gain a retail platform for reaching ordinary consumers. "Everyone is talking about clicks and mortar," says John Robb, one of the founders of e-commerce research firm Gomez Advisors, referring to the recent wisdom that even online stores need a bricks-and-mortar presence to attract and hold onto customers. "Radio Shack has the mortar, and Microsoft doesn't have any."THE GREAT MASSES. Through Radio Shack's 7,000 retail stores, which the company says are within five minutes of work or home for 94% of Americans, Microsoft can serve a less technologically sophisticated segment of the population and promote its MSN Internet service. Now that 40% of American homes are connected, the software king "needs to reach the kind of people that need to be shown or taken through the process of getting on the Internet," says Papp. "That's where Radio Shack takes them."

Tech suppliers who don't have a physical location will be at a disadvantage when it comes to this new consumer, agrees Robb. "The mainstream consumer wants to be able to drive over to get the parts they need and the advice they need to make the stuff work," he says. Microsoft will sign up more customers for MSN, and that will ultimately drive more traffic to all of its Web sites. "It's really about getting more eyeballs to Microsoft Web sites," says Brian Goodstadt, an analyst with Standard & Poor's equity research group.

Longer term, Robb believes this is a step toward Microsoft getting deeper into the consumer electronics business. For example, to compete effectively in the burgeoning market for handheld Internet devices, he thinks Microsoft will have to make both the software and the device. Radio Shack will be able to provide widespread retail distribution when Microsoft introduces new products. "I think we'll see a flurry of announcements," he says.POSITIVE COMMENTS. Analysts who cover both Tandy and Microsoft have cheered the alliance. "It looks like a win-win for both," PaineWebber analyst Don Young commented during a conference call with management from both companies on Nov. 11. Microsoft shares, which experienced their first up day since Judge Thomas Penfield Jackson issued his "findings of fact" on Nov. 5, climbed 2 1/2 points, or 3%, to close at 89 5/8. Merrill Lynch analyst Chris Shilakes didn't change his earnings estimates as a result of the announcement, in part because the "store within a store" concept won't be rolled out for nearly a year. But he notes: "If this partnership bears the fruit expected, it would go a long way toward catalyzing Microsoft's shift from the desktop to the Internet."

Merrill Lynch also issued positive comments on both Tandy and Circuit City on Nov. 11. "Simply put, Microsoft's strategy will bring in more customers that will spend more money," analyst Peter Caruso wrote of Tandy. "Microsoft's $100 million equity investment in Radio Shack e-commerce is an added bonus." Tandy rose 6 1/4 points, or 10%, to close at 71 7/16.

Circuit City (CC) also got Caruso's nod because, as the electronics retailer with the second-most retail stores (600), it could now join with America Online in a similar alliance. "Retail distribution is a key attribute that AOL is looking for in a strategic partnership as they branch outside of the ISP business into other areas," he wrote. Circuit City rose 7 1/4 points or 19%, to close at 45 1/2. Best Buy (BBY), which has 350 retail stores, also rose on the news. It climbed 5 3/4 points, or 12% to 54 1/4 on Nov. 11.

While joining up with Radio Shack isn't the start of a new Microsoft, it is much more than a public relations stunt. It's part of Bill Gates's long-term strategy "to prepare for life beyond the PC and its traditional Windows business," says Goodstadt. But coming less than a week after the judge's bruising findings, the consumer-friendly announcement was certainly timed right.By Amey Stone in New York


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