DrunkenBlog

Screwing the resellers

Cringley has a new column out called "Divide and Conquer" which is worth a read if you're a mac user. Of particular interest to me is this bit:

Absolutely look for the rape of the resellers, and then MAYBE look for the end of Macintosh hardware.

...as I've been wondering about resellers more and more as time goes on when looking at some of Apple's stock configurations.

If you are buying a PowerMacG5 or PowerbookG4, and want any decent kind of options at all (decent video card, more VRAM, faster stock drives) you aren't going to be able to get them unless you order through Apple.

Resellers are stuck with the stock config. When the Powerbooks hard drive isn't even user-serviceable in the newer models... if I were a reseller, I'd be pretty pissed off.

Then I'd be scared to death.

And arguably the retailers have a real right to be scared... this isn't the first time Cringley and others have seen small moves by Apple, which when added up really, really paint a dire picture for the resellers.

An important distinction to make is that there are many different tiers of resellers. You have the Circuit Cities, Sears, the Best Buys, the CompUSAs. Only one of those I believe actually sells Macs now. You also have the small mom-and-pop shops dedicated to selling Apple hardware, which while they're called mom-and-pops really can range in size from 1 to 30 people, dedicated to selling Macs and serving them.

Some are able to service macs, some aren't. But in the days before the AppleStores and internet, it was often these guys that you'd turn to if you had them in your area. People from California or the northeast coast will have a harder time relating to this than those in say, the midwest. There are of course the catalog guys, such as MacMall or internet-based resellers like Smalldog.

None of these guys make up a huge amount of Apples business individually, but as a whole they add up to a big portion of Apples business. Apple Stores aren't in every city, and not everyone is willing to buy online direct from Apple sight-unseen. There's also the peripheral, software and service aspect. Dell has all kinds of partnerships with different VARs (value added resellers) so that if your Dell breaks down, 9/10 someone can be onsite to fix it. Apple isn't that big, and these guys do play a role.

Something a lot of people miss when it comes to thinking about Apple resellers is that it is not a very lucrative business on the whole. You might think it was, given Apples somewhat boutique status and incredibly high margins, but those margins aren't seen by the resellers. In fact it can often be more profitable for them to sell something else, even the incredibly cheap x86 whiteboxes can allow for more margin for the resellers (especially if they're mad in-house, aka whiteboxes) than an iMac or eMac.

Apple even controls how much margin an reseller can make from selling an Apple product (hint: it's a single percentage point), which can really put the hurt on. Being an Apple VAR isn't a walk in the park either. Lets say you take your G5 into an Apple VAR for service, and much as to be fixed. Apple has set prices on what a VAR can earn while performing repairs, which were between $30 and $65 total.

Which isn't a big deal if the guy just has to swap some RAM sticks or reinstall the OS. But real testing, or finicky repairs (logic boards, displays, just about anything related to a powerbook) are going to cause these guys to eat money. Lots of it. Apple techs by and large aren't $5 an hour flunkies who have used macs for awhile. Apple has pricey training you have to go through, and tests you have to go take. It adds up.

It's not exactly a cash cow, but a lot of these guys have been around for ages, and service places where its hard for Apple to reach, and there isn't much competition in Kansas for lots of mac shops to come in and compete against you. They've built relationships over years with long-term customers... but its a rarity to see any mac reseller shop look any nicer than a PC reseller. The money just isn't really there.

The idea of course is that if Apple cuts these guys out of the loop, it can eek out extra margin. The 5% the reseller was making is now added to Apples coffers. Of course its not a straight addition, as Apple now has extra expenses, but due to their being larger they can be spread out and minimalized compared to what a VAR can do.

Which isn't to say that Apple doesn't bring a lot to the table by doing a lot of this. The Apple Stores can really, really put the hurt on a VAR in the area, but they really do add a lot of value from the customers POV and well, they're just cool. I know I dig them.

So it should be a no brainer that cutting out the resellers where possible is a good thing, even while it kind of sucks for the resellers affected, right? Unfortunately it's not that cut and dried, as Apple has learned in the past.

Awhile back, Apples educational marketshare got decimated. I mean decimated. We're talking huge swaths of people that bought macs moving to PCs over the course of a quarter, then a year. The story behind it was Apple basically screwing up royally, to the point of having to apologize to the shareholders.

How did they blow it? They tried the same thing as they're slowly moving to now... just much, much faster.

At the time, many, many schools didn't buy their Macs directly from Apple, instead they bought them through independant salesmen and VARs (value added resellers). These companies or individuals would go in and build long term relationships with the schools. They wouldn't just sell them 100 iMacs, they'd offer support services, services for getting them networked correctly, demonstrate technologies or new models, etc. Some of these relationships had been around for more than a decade.

Apple decided it could make more money by using its own sales people, and its own support contracts, and hence went in and fired everyone. Or rather, made them ineligable to sell their products. Instead they hired their own guys who showed up to try to make the sale, demo product offerings, and I'm sure in some part of their mind assumed that they'd of course still buy Apple, they'd just be buying it directly from Apple.

There were two problems:

• If someone isn't selling your stuff, chances are they sure as hell are going to sell someone else's
  People don't just go and start flipping burgers because Apple wouldn't let them sell macs. They often went right back to the schools, only this time they were selling PCs. It wasn't pretty, especially with the long standing relationships in their pocket to exploit.
  
• Apple really didn't take into account just what a lot of these people had done to keep the schools using macs
  Apple has had some successes with schools in recent years involving iBooks, but the consistent problem the schools have noted have been service and support issues. Apple just really didn't (and doesn't) have the infrastructure, support people or flexibility to handle all the little things that come up. As I noted before, these guys often didn't make their money off of the actual hardware but with the support contracts.
  

The above is just a cautionary tale, in that all spreadsheet sums might be missing a variable in the equation. Perhaps the speed at which Apple is making it... inconvenient... to not buy from them directly will play a role in mitigating the effects. But then again, it might not.

Worrisome.

 Posted by drunkenbatman
    May 21, 2004, at 04:45 PM