[tptacek]

No, to both of you. No no no. Best Buy didn't "earn" 140MM; according to this story, they achieved 140MM of revenue. Revenue for Best Buy is the price tag on consumer electronics. Bust Buy doesn't pull those consumer electronics out of its butt; it pays vendors to acquire those goods, marks them up, and sells them to customers. Best Buy is a public company and is required to account for this difference, which is its gross margin. Best Buy's gross margin hovers around 25%.

If it all this suit cost Best Buy were the damages and penalties we already know about, then they are already close to wiped out on the deal (27MM vs. ~35MM, less legal). But that still doesn't capture it, because Best Buy spent money to clone this startup's offering and also to run the company and keep the lights on in the stores, which are expenses not captured in Best Buy's gross margin.

Incidentally, the 22MM figure also didn't get pulled out of some judge's butt. If you read the jury's finding, it's the amount of unjust enrichment Best Buy achieved by misusing Techforward's property.

In the very worst case scenario, virtually every penny of profit from this program was redirected from Best Buy to the winners of the lawsuit. But it's even more likely that Best Buy took a bath even beyond the imputed profits we're talking about.

[gwern]

That's a good point - revenue is not profit - but I'm not sure it is it a conclusive point. First, why would you assume the final estimate of revenue which came out of the sausage system of the legal system, with Best Buy's lawyers presumably heavily incentivized to knock down the estimate at every point in every way possible, is remotely accurate? An economics book on cartels and their prosecution I read (_Global Price Fixing_) noted dryly that the estimates of illicit revenues and hence profits in the cases were nowhere near what an outside would calculate especially in the case of the vitamin cartels.

(A more picayune point is that a small profit or a loss to Best Buy in one case doesn't mean that its practices are not a net expected profit; indeed, if they weren't losing an occasional case, they probably aren't taking enough risks to make the most possible profit.)

[tptacek]

The gross margin comes from Best Buy's SEC filings. They have every incentive in the world to report the highest possible margin.

[ruby_on_rails]

Not really, best buy and any other company of its size are more concerned with tax filings (which should be an "Ah Ha" moment for those of you at home), which generally gives companies an incentive to jack up costs and consequently decrease revenue. If you want a better idea of what their margins actually are you best bet would be to talk to a good (read: independent) investment analyst.

Also, best buy pays ~27 million (adjusting for the time value of money over two years at 2.5% gives us 25 million, btw) for a golden goose they can reuse year over year and had they build it themselves they wouldn't have had it immediately. I don't have all the details, but the project (including legal costs) will likely pay for itself before 5 years is up. They also mitigated any risk with building it themselves and doing it wrong which would cost additional time and money.

As a side note, I am curious if the court decision has any impact on the possible of Best Buy whoring out their duplicate system.

[tptacek]

This comment suggests that Best Buy, a publicly traded company, is incentivized to minimize its gross margins. That is an extraordinary claim.

Meanwhile, Best Buy no longer operates the buyback program. The program wasn't a golden goose.

[ruby_on_rails]

You misunderstand. Minimizing margins and maximizing revenues are not mutually exclusive. Also, saying an entity is publicly traded irrelevant, as you are suggesting we know every detail about a company simply by reviewing their financial documents and investor relations mail; this is not the case.

Furthermore, I will happily make the "extraordinary" claim that, in general, large companies are incentivized to minimize margins to reap the tax benefits. Then again I am Joe Blow with a whole 46 karma, therefore, I must not be as smart or knowledgeable as a lurker like you with 1000's of karma, right? (oh and this one is a rhetorical question)

As usual on this particular site, if someone doesn't like the truth, they simply think its wrong because they don't like it. I half expected to get super down voted by all the closed minded individuals that have <~500 karma, but I guess you had the skeleton shift ehh tptacek.

As far as the golden goose goes, even if they scrap the program they are still better off. Does it sound better pouring far more money into building what you think is a golden goose only to make a lemon? That and they still have the system if they want to modify it and roll it out again a couple years from now. Also, they got the system right away and immediately got feedback from it. They saved a lot of time, time that they will use now on more lucrative projects.

[tptacek]

Best Buy is priced in the market in part based on their margins.

[johnrgrace]

Your point would be right if companies SEC filing matched their tax filings. Companies are ALLOWED to keep a set of Tax record books and accounting record books and pay taxes based on the profits from their tax books. The Tax books have been screwed with beyond all belief, the SEC ones not so much. My wife is a CPA and I've got a masters of finance and have spent time doing the tax book game.

[pc86]

I'm willing to bet the $5MM in punitive damages put Best Buy squarely in the red if they weren't there just after the $22MM.

[tripzilch]

Where do you get the numbers for BB's gross margin? Isn't 25% a bit small? (also does it mean they mark up the vendor price by 25% or that 25% of the consumers price tag is profit?)

[saraid216]

I googled "Best Buy gross margin" and this was the second result: http://ycharts.com/companies/BBY/gross_profit_margin

[qq66]

Your calculation ignores the likely dozens of other companies Best Buy and other BigCorps have screwed over with no consequences whatsover. They rolled snake eyes in this case but this will still be business as usual until damage awards become 100x actual damages, since 99 times out of 100 the BigCorp's lawyers will have their way.

[tptacek]

My calculation ignores a whole world of injustices and unfairnesses, because it is about this particular case.