Big Box Retailers and the Internet Age
After mixed results in forays into consumer electronics over the years, Wal-Mart hit it big with a $398 laptop PC. The retail relationship it forged with Hewlett Packard is chronicled in today's Wall Street Journal (subscription required). The elevator summary is that Wal-Mart, which was losing electronics sales to big box discounters such as Best Buy and Circuit City, counterattacked by joining forces with HP, which itself was lagging in the PC market. Wal-Mart had attempted computer retailing in the past, but with inconsistent results. This fall, however, the $398 HP Pavilions, with a 15-inch LCD screen, a 40-Gb hard drive and a CD-Rom, flew off the shelves. The Journal reports most stores sold out within minutes of opening the day after Thanksgiving. The low-price laptops are also out of stock on Wal-Mart.com. Something's happening that many, especially those who contend that government intervention is required to bridge the digital divide, said would not. Market mechanisms are driving PC prices down to where they now reach the low-end of the market. City officials in Philadelphia, San Francisco and other cities say we need tax subsidies to get computers into low-income households. But can any city program beat $398? And the price point could even be lower by the time Philadelphia and other cities get their own programs going. And let's not kid ourselves, no city can purchase at the volume Wal-Mart can. HP's margins were cut to the bone; offset, according to the Journal, because it shipped 34 planeloads and 221 truckloads of PCs and accessories to Wal-Mart stores nationwide. Nothing's been said yet about WiFi or Internet connectivity, but the resounding success of the Wal-Mart-HP holiday tie-up will get the attention of the industry, which itself has been cagey about predicting when the low-end would truly develop. Going into 2006, however, don't expect Target, Best Buy and Circuit City to sit around slack-jawed. Someone's going to up the ante. Let's also remember that HP was a finalist in Philadelphia Wireless' municipal broadband bid. Although HP lost that contest to EarthLink, it is still seeking a wireless play. This makes HP's choice of Wal-Mart as a retail channel is as provocative as it is promising. If HP had won the bid in Philadelphia, would Wal-Mart have been in line to be a wireless retail partner? Most cellular companies sell through big boxes, so the idea of bundling telecom equipment and service is not alien. For a service provider such as EarthLink, which is staking its future on wireless service, a big box alliance offers a national sales channel that is deep and wide. It certainly means less dependence on direct mail, free CDs, and expensive ties to PC vendors, whom they pay to pre-load introductory software and a display a desktop icon in hopes that someone, somewhere, will point and click. Speculation aside, when a high-end technology company like HP teams with a discount retailer like Wal-Mart, it validates the free market approach to consumer IT and telecom. While municipalities waste time and taxpayer money trying to devise government programs to get cheap PCs into people's hands, the market went and did it–faster than anyone thought.