Shares of Best Buy Co. Inc. fell Tuesday after competitor RadioShack Corp.'s fourth-quarter preview served as a bad omen for the wireless business.
THE SPARK: RadioShack said late Monday that its fourth-quarter profit would come in lower than expected because of holiday discounting and tight consumer spending. However, it was clear that continued weak demand and tight profit margins in its wireless business were also to blame.
THE BIG PICTURE: Electronics retailers like RadioShack and Best Buy have made wireless phones and services a bigger chunk of the business in recent years to make up for sagging sales of other electronics. That has started to backfire as demand has softened for certain cell phones and services at their stores.
Consumers are looking directly to cell phone providers for their needs and bypassing retailers. Additionally, the margins for retailers are shrinking on their wireless business.
If RadioShack, which has made mobile the crux of its business, is not performing well, then Best Buy is likely to suffer as well. Best Buy has put a much heavier emphasis on its wireless business, already committing to open a number of new Best Buy mobile stores in the coming years.
THE ANALYSIS: Morningstar analyst R.J. Hottovy said companies like Apple and Samsung are the ones that are benefiting in the wireless market. And RadioShack's report revealed longer-term concerns.
"Clearly this is a category that they (retailers) are looking to for growth," he said. "But we've always been concerned that the manufacturers and the carriers themselves are the ones really extracting the profit."
SHARE ACTION: Best Buy's shares fell $1.34, more than 5 percent, to $24.04 in midday trading. Shares have traded between $21.79 and $35.45 in the past 52 weeks.