Saving Windows Phone 7: Microsoft Needs More Retail Stores

It’s been a year and a half since Microsoft cut the ribbon on its first retail store in Scottsdale, AZ and we have, um, eight stores total, with two more — Atlanta and Seattle — in development. I’m sorry, but that’s not going to cut it when magical Apple retail palaces appear on every other block.

Microsoft top brass are all too aware of this. According to reports this week, Microsoft CEO Steve Ballmer and COO Kevin Turner are at odds with other company executives, and, presumably shareholders, about retail. Ballmer and Turner want to go after Apple aggressively and open more stores. But that may be financially impossible. You see, if the eight Microsoft stores out there were turning sweet profits there would be more than eight stores. A store, it turns out, is really expensive to build and maintain.

That’s even truer for Microsoft when its products — Windows 7 PCs, Xbox Kinect, Windows Phone 7 — are available at the same price at other venues such as Best Buy. And obviously, there are a lot more than eight Best Buys in the U.S.

On the other hand, Apple stores give consumers is an exclusive lifestyle experience, albeit a pricey one. But it also limits retail alternatives. Come in to the Apple cosmos; there’s no place like it on earth.

Microsoft can’t provide this lifestyle experience, as hard as it tries to promote Windows Phone 7 and Xbox Kinect as life altering. Microsoft doesn’t brand, sell and profit from the whole hardware-software banana like Apple. Microsoft strength is interoperability and it has to work with hardware partners and share profits with them. And again, customers can buy Microsoft’s products elsewhere. Kinda makes it hard for Redmond to make a buck off its retail stores.

But financial realities aside, Ballmer’s desire for more stores makes sense. Microsoft needs all the retail stores it can build to keep its crucially important Windows Phone 7 from being swallowed up by more popular Android phones, iPhones and BlackBerrys on shelves at AT&T stores and, at some point soon, Verizon stores. The same goes for Microsoft’s sllllloowwwly gestating Windows tablets, set to arrive in full with the next version of Windows in the second half of 2012.

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A Microsoft store could separate Windows phones and tablets from the masses and push the brand in a more controlled environment. Windows Phone 7’s U.S. market share is below 8 percent and not growing, according to comScore. That’s not good. More Microsoft retail stores would mean more Windows phones sold, and the stores could benefit from the WP7 rejuvenation predicted by IDC and Gartner to kick in when WP7 starts running on Nokia hardware next year.

Though it may be financially impractical to open stores at Apple’s pace, Microsoft chiefs Ballmer and Turner are still eager to do it. I, for one, would love to see Microsoft stores increase ten-fold just to give Apple and Best Buy some competition.

But is it wise for Ballmer to overinvest in retail stores after having half his bonus cut in 2010 and recently being stung by a 40 percent employee approval rating? It’s a risk, but one Ballmer seems willing to take … that is if Microsoft shareholders let him.

One thing’s for sure: Microsoft’s current retail growth rate will not stand. If it only opens eight stores in the next year and a half, the show is over. Time to join Gateway, Sony and Nokia in the retail graveyard.

Shane O’Neill covers Microsoft, Windows, Operating Systems, Productivity Apps and Online Services for CIO.com. Follow Shane on Twitter @smoneill. Follow everything from CIO.com on Twitter @CIOonline and on Facebook. Email Shane at soneill@cio.com