Best Buy on Tuesday reported weaker than expected third-quarter profit, as competitors slashed prices on flat-panel televisions and its profit margins got squeezed. In an telephone interview, Best Buy CEO Brad Anderson discusses what happened in the quarter. Below is an edited transcript of the interview:
    
Reuters: It seemed like here was a lot of price competition in the 40-42 inch size (flat-panel television). Can you talk a little bit more about the larger size TVs, and is there an opportunity there for you to protect margins in those larger televisions?
Anderson: Customers are buying larger and larger screen sizes, but prices have come down about 30 percent on plasma TVs for instance, so we’re expecting the kind of pricing and margin pressure. The biggest thing we had happen in the last quarter is that the Thanksgiving weekend was more promotional than we expected…well actually …not so much more than we expected, but what people bought were at even lower margins than what we had anticipated. But overall it’s a very competitive business. It’s going to continue to get more competitive as a higher and higher percentage of the population is buying flat panel and larger screen size.
 
Reuters: Best Buy is focusing a lot on service with its Magnolia home theater installers, the Geek Squad. Does it look like it has come to the point where maybe customers don’t want services? They just want a good price on a TV and they’re willing to load it in a car and get it home and set it up on their own?
Anderson: No, our install business was up triple digits, so we had huge demand for install. Geek Squad was up very high double digits — so both are growing very rapidly.
 

Reuters: On the conference call with analysts there was talk that people want more service the larger the screen is? 
Anderson: If you and I went off and bought a 25-inch flat panel, that’s relatively easy to hook up. …But if you get to a bigger screen size, now transporting it is a problem. They’re very delicate. They’re also relatively heavy. And now you start putting other devices — Instead of maybe just a cable or satellite box connected up, you are now putting a whole range of things from computers to high-definition DVD players, etc, — All of which makes it much more complex to put together. So we look at the screen size as being the big variable as to whether people want service.
 
Reuters: Do you think that services will change as prices come down on larger screen sizes, and more people are able to buy them?
Anderson: No, because you’ve got all of the same kinds of issues. …So far, our experience has been that it’s completely related to screen size. Larger screen sizes are getting a lot less expensive, and that’s part of the reason we’ll see so much growth in install and service. 
 
Reuters: What really drove that tremendous price competition Thanksgiving weekend? Is it discounters coming in and trying to grab share from specialty retailers?
Anderson: No. First of all, Thanksgiving weekend has continually gotten more aggressive over the last numbers of years in our business. And customers continue to get sharper in terms of finding the very best value. …So everybody sort of chases that weekend, and the pricing offers will continue to get more aggressive. 
 
Reuters: Were you surprised at how steep they went this year in terms of those pricing offers?
Anderson: Yes, it was steeper discounting than we expected.
 
Reuters: Will this change your plans as you go into either this December holiday season or next year’s Black Friday weekend?
Anderson: No. I’m sure we’ll be as aggressive next year as we were this year. We’ll adjust our expectations based on what we’ve seen from the consumer. I don’t see it changing our plans. ….We think that overall, our results are very good and we’re very optimistic about the year as a whole. Next year we might adjust what we would expect to see happen, but I don’t think we’ll change our strategy.
 
Reuters: Can you talk a little bit about video gaming? We had Nintendo’s Wii and Sony’s PlayStation 3 come out right before Thanksgiving. How is this year compared to last year when we had the Xbox 360 just hitting the market?
Anderson: Xbox has done really well and we’ve got it in stock. So that’s been a real strong leading indicator for us. Obviously, for both the Wii and PlayStation 3, everybody is selling the items as soon as they can possibly get them. Those are things that deteriorate margins for us because the (video game consoles) are sold with very little margin. But longer term it’s good because there’s more margin for us as we get into selling not the game set, but the games that are played on it. So we’re excited about seeing so many units being sold into the market
 
Reuters: Were you happy with the allocation you got? Everyone wants more than they do get, but do you feel you got a fair allocation?
Anderson: If Sony’s reading this, no. (He laughs) Overall we feel like we’ve been treated fairly by Sony and Nintendo.
 
Reuters: Do you get push back from customers when they see a hot product like a PS3 in such short supply?
Anderson: Yes
 
Reuters: How do you deal with those customers?
Anderson: We try to be very, very clear. Like when we had all of those people standing in line, we tried to let them know which ones were likely to be getting one (a PS3). We’ve tried to be as upfront as possible about the limitation of supply. But you’re stuck with not being able to promise solutions to customers, because we can’t get anything close to the demand.
 
Reuters: Is iPod demand cooling at all this year?
Anderson: No. iPod has had explosive growth. We’re not expecting the same kind of explosive growth we saw in the last few years. But we’re expecting a very strong iPod season.
 
Reuters: Any surprise products that have emerged as hot this year?
Anderson: I think the biggest surprise we’re having is how strong notebook sales are. As notebooks continue to get more capable and come down in price, we’re seeing much more demand I think than we thought.