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Microsoft retail push could alienate erstwhile partners

Microsoft's planned retail push -- a response to Apple Stores -- was not surprising, but it still raised eyebrows among some long-time channel partners.

Microsoft's decision to get into the cutthroat retail business with its own Microsoft-branded stores was not surprising, but it still raised eyebrows among the company's long-time channel partners. News of the Microsoft retail push was disclosed late Thursday.

A source familiar with Microsoft's planning said that David Porter -- the Wal-Mart veteran brought on to head up the retail effort -- must come up with the strategy. Porter has yet to decide on such basic factors as number of stores and their locations.

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The knowledgeable source said existing retail partners were briefed on this move, although he could not say when that happened. He said that the project is in its infancy, so retailers will have time to adapt. "This is no surprise," he said. Porter starts his new gig Feb. 16.

Ever since Apple Inc. launched its glitzy Apple stores in 2001, channel watchers have waited for Microsoft to follow suit. Of course Apple, which launched and then eviscerated a successful channel program, especially in education, had fewer retail partners to offend by opening its own stores. Microsoft, on the other hand, sells its software, as well as some hardware -- mice, Xbox -- through many retailers. That, and the fact that electronics retail is swooning with the closures of CompUSA and Circuit City chains, makes the Microsoft move a bitter pill for surviving retailers to swallow. Even strong retail chains like Best Buy are struggling mightily

Heather Clancy, contributor and analyst with SWOT Management Group, based in Hillsborough, N.J., said Microsoft has no choice but to break into retail.

"This is an attempt for Microsoft to hedge its future bets," Clancy said. "Who spends time at malls? Teenagers. Microsoft does not have an affinity or brand with folks below their late twenties. All those people hear is about Google Apps, Apple, iTunes and all these Web 2.0 apps used in college [that] are setting the stage for what people want to use in the workforce. If Microsoft doesn't get out there with its name, it'll become irrelevant."

George Brown, CEO of Database Solutions, a King of Prussia, Pa.-based VAR said Microsoft obviously hopes to emulate the success Apple had with its stores. "Apple stores did a great job spreading and extending Apple's brand," Brown said.

As for the competitive picture, he said Microsoft stores will put more pressure on the "Staples and OfficeMaxes of the world and may well put some of those [stores] out of business,"

He expects Microsoft will use its retail presence to push consumer home networking and related products that don't carry enough margin to be worth while for VARs to sell.

Some observers said that a Wal-Mart exec brings volume and discount experience but not the "Apple aesthetic" that sparked the success of the Apple stores.

"I see [Microsoft's retail project] as a desperate cry for relevancy," said Jeff Matthews, a long-time Apple and Microsoft watcher and managing partner of Ram Partners LP, a Greenwich, Conn.-based hedge fund.

Matthews has long been critical of Microsoft's seeming inability to compete with Apple's slick iPhone and iPod efforts.

"They've hired a Wal-Mart veteran to run it. And that's no surprise because just look at who's initiating it -- COO Kevin Turner, a former Wal-Mart guy," Matthews said.

"They will do it like all Microsoft 'get jiggy' initiatives, such as 'Bob' and 'Zune'. They will announce grand openings and they will splurge and they will proclaim it is exceeding expectations."

Matthews said the effort will "end in three years or so when they quietly close the stores after concluding that they want no more hostage situations triggered by angry Vista users who have said 'to heck with waiting on customer support for 17 days, I'm gonna go get me help right now at that new store.' "

Others in Microsoft's VAR channel said they were not surprised at the move and are unaffected by it. Some also privately wonder aloud about exactly how much of Microsoft's software will start moving this way, as the vendor, like its competitors, continues to tighten the feedback loop between itself and users.

There is always the fear that as tech vendors tighten these ties -- delivering updates and patches directly to customers -- channel partners are going to be frozen out of upgrade revenue. It's all about a struggle for account control, they say.

Still, the VARs are philosophical. Microsoft, said one, is always in every channel. Its volume orientation makes this inevitable.

"It's just life," said one partner.

This story was updated Friday afternoon to include more VAR comments

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