It is definitely the sensation of the month that Microsoft Corp. has decided to open its own retail stores to sell its products. But will it actually help the company to improve its sales, or will it improve the company’s image, which will boost earnings ultimately?

Considering the fact that Microsoft is more and more into hardware business, it makes sense for the company to start creating its own retail chain. However, given the fact that the bulk of Microsoft’s revenue comes from software, own-brand retail outlets will hardly help the firm to boost earnings. Analysts from Technology Business Research believe that Microsoft’s retail store plans have more to do with marketing and advertising rather than with actual sales.

“If Microsoft intends for retail stores to drive revenue growth they will likely be disappointed, but leveraging stores to improve customer perception and as marketing tools could be successful,” said Allan Krans, an analyst with Technology Business Research.

It is well known fact that stores do not draw consumers to products, but innovative products bring consumers into stores. Apple’s retail store rollout coincided with the introduction of the iPod in 2001, which gave a very compelling reason for consumers to visit its locations, reckons TBR. Microsoft’s main products – Windows operating systems and Office suites – are available by default on the vast majority of personal computers sold on the planet, hence, newer versions are hardly considered as breakthroughs that attract consumers to the stores, according to the analyst.

But besides software, Microsoft also sells its keyboards and mice, Xbox video game consoles, Zune personal digital media players and is rumoured to enter the smartphone business shortly. Moreover, latest technologies that Microsoft implements do not reach retail store shelves widely overnight: average consumers still hardly know about the benefits that DirectX 10 provides, with the Windows 7 release it will be necessary to demonstrate advantages of touch-interface and it is clear that touch-screen sensitive displays are unlikely to reach retailers truly widely. Therefore, there are still a lot of reasons to open Microsoft’s retail stores to show the latest technologies of hardware and software.

But there are other things to consider for Microsoft: more than 95% of the company’s revenue is driven by distribution partners, and the PC OEMs and retailers are the lifeblood of its highly profitable operating system and Office product sets, the TBR analyst claims.

“The issues with Windows Vista have already put many of Microsoft’s partners on edge, and a push into retail could further strain relationships with key distribution partners. Microsoft is already being delicate in addressing how this strategy impacts partners, stating the primary focus is on deepening customer understanding and relationships, and that Microsoft will share those insights to improve relationships with existing retailers and OEMs,” claimed Mr. Krans.

TBR sees Microsoft’s retail strategy as an attempt to regain customer interaction, simultaneously improving its customer perception while gaining valuable insight into what customers want, and how they’re using Microsoft products. Microsoft does not shy away from loss-producing investments, as long as there is upside potential in the future.

“We expect Microsoft’s venture in the retail space to be more similar to Gateway than to Apple, and its locations are not expected to generate any significant revenue or profitability for the company. Microsoft likely realizes this fact, and direct financial gain is not the ultimate goal of its strategy. Utilizing these locations to gather valuable customer information and improve its market perception could be very compelling reasons to invest in retail locations,” concluded Mr. Krans.

Tags: Microsoft, Windows, Xbox, Zune