Best Buy Goes Shopping for SMBs : Speakeasy Acquisition Expands Retailer’s Communications Aspiration

When Best Buy plunked down $97 million for broadband services provider Speakeasy Inc. it altered how small companies can obtain communications services, sparked a frenzy of activity among telecom providers dialing up investment firms to seek similar pairings, and created yet another type of animal competing for business on the communications frontier.

The transaction, announced March 27, should close some time this month. Once that happens, Best Buy’s B2B unit, Best Buy For Business, will combine the assets of Geek Squad, Speakeasy, and the Best Buy hardware and office supplies divisions, to become a one-stop communications shop for small businesses.

Speakeasy — which sells T1, business-class DSL, business VoIP and managed services to verticals such as real estate and doctor’s offices with 50 or fewer employees — will operate as a wholly owned, yet independent, subsidiary of Best Buy. It will remain in its Seattle headquarters with its management team and employee roster intact. There will be no layoffs. “We look at this as all about growth,” says Speakeasy President and CEO Bruce Chatterley.

In addition to its existing channels, Speakeasy’s services now will be available through 281 Best Buy stores, the Web and over the phone. “We can bring that brand-name recognition to the dance, if you will, as well as good national distribution, direct sales and retail sales, which will really help build [the Speakeasy] brand,” says David Hemler, vice president of sales and operations for Best Buy For Business.

But he vows that Best Buy will stay as hands-off as possible so Speakeasy can maintain its customer-centric focus even while scaling to a national level. “We want to keep them as a separate operating subsidiary to get the best of sales integration, but not give them a bear hug so tight that we ruin the culture,” Hemler explains.

While this new deal is a key part of its move into communications, the Speakeasy pact does not mark Best Buy’s first foray into this space. The company already sells cellular, cable and VoIP plans, such as those from Amp’d Mobile Inc., Time Warner Cable Inc. and Vonage Holdings Corp.

Most industry insiders and analysts see Best Buy’s acquisition of Speakeasy as a plus, even though the two are strange bedfellows. “I haven’t seen someone [like Best Buy] go out there and decide to go whole hog and buy a service provider,” says Will Stofega, research manager of VoIP services for IDC. Still, he says, the union makes sense — many technology companies partner to offer managed services. Why not a retailer?

Some predict that if Best Buy pulls off the strategy, its competitors will execute copycat deals. “The bottom line is we’re seeing new and different players getting into the telephony business,” Stofega says. “How we consume communications services is changing.”

While that may be true, some see Best Buy and Speakeasy as a mismatch. Current Analysis Inc.’s Brian Washburn, a principal analyst for business network services, fears that under the Best Buy umbrella, Speakeasy’s service quality will go down. The service provider, he says, “has a premium services reputation that will be at odds with Best Buy’s budget-conscious buyers. The majority of Speakeasy’s customers are still power users, not small businesses, and the retailer ignores this fact at its own peril.”

So how did Speakeasy hook up with an electronics retailer? It happened after Speakeasy last year decided to send out feelers for a buyer. “It was not out of any sense of threat to our business,” Chatterley says. Rather, because M&A was rampant in telecom, executives thought a merger might keep fueling the company’s impressive growth. Accordingly, Speakeasy met with its investor, Blue Beacon Capital LLC, to brainstorm potential partners.

The usual suspects — other providers — came to mind, until late one night on an airliner, Gerry DeHaven, Blue Beacon’s managing director, wondered whether office supply chains or electronics retailers would make a good match. “We thought we might find more value, frankly, with a company that was looking for a platform to jump into this space,” he says.

Speakeasy liked the idea, so Blue Beacon made the rounds. It approached Circuit City, Office Depot, OfficeMax, Staples and Best Buy. “I guess some luck was involved,” DeHaven says. “The Best Buy folks were in the process of cultivating a new, non-retail strategy, and Speakeasy fit really well.”

The approach seems very viable, says Lisa Graham, senior vice president of wholesale partner relationships for Covad Communications Group Inc. Not a surprising response to the deal, considering Covad is Speakeasy’s wholesale broadband supplier, and stands to absorb more network traffic as Speakeasy bursts onto the national scene. “Large retailers are beginning to understand that they’re not only catering to consumers, but that small businesses are shopping in retail locations,” she says.

The merger also pushes traditional service providers to consider how they talk with their business customers, says Scott Wharton, vice president of marketing for BroadSoft Inc. Speakeasy uses BroadSoft’s platform for its VoIP services. “I think what Best Buy has identified is this gap where everyone’s competing on price and no one’s really offering value and service,” he says. “This is a huge leap forward for the VoIP space and small business.”

Perhaps that helps explain why DeHaven’s phone has rung off the hook since the Best Buy-Speakeasy agreement was announced. Other telecom players, drawn to the idea of reaching new kinds of customers, want to know if a big box store might want to put their services on the shelves.

The Acquirer

In business since 1966
Operates 1,150 stores in the United States, Canada and China
Boasts 2006 revenue of $30.8 billion
Trades on the NYSE under ticker symbol “BBY”
Owns four subsidiaries: Future Shop, Geek Squad, Magnolia, Speakeasy Inc.
Employs 125,000 people

Source: Best Buy

The Acquired

Founded as one of the world’s first Internet cafés in 1994 by Mike Apgar (now chairman), Speakeasy quickly grew and eventually expanded into full-service national broadband services, its primary focus today.

The company targets certain niches, including lawyers, accountants, media companies, restaurant chains, clothing and mattress retailers. These small firms desperately want quality service at fair prices, says Bruce Chatterley, Speakeasy president and CEO. In response, Speakeasy decided to offer one bill, a single support contact and flat-rate pricing.

“My view is, what’s good for small business is good for the American economy,” Chatterley says. “The more we can help the small business segment to compete and thrive, the better off we are as an economy.”

Speakeasy provides T1s, DSL, VoIP and managed services, competing against big phone companies and CLECs in 120 metro markets. Its more than 40,000 customers also include tech-savvy, bandwidth-hungry consumers such as online gamers, to which it catered early on.

The Synergy

One of the biggest benefits of this deal for Speakeasy is Best Buy’s ability to turn its relatively obscure brand into a nationally recognized one.

That’s what the retailer did for Geek Squad, the Minneapolis, computer services outfit it bought in October 2002.

But while Speakeasy is not a nationally known brand, the Speakeasy name is renowned in telecom, says David Hemler, vice president of Best Buy For Business. People who know the company turn into “very passionate, avid followers,” he says. “I liken them almost to the Apple of the connectivity space.”

That reputation was built primarily on word of mouth, however, adds Speakeasy President and CEO Bruce Chatterley, noting that method of marketing only goes so far.

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