Channel Conflict at Apple

Presented by

Sucheta Amin M-11-02Radhika Bhoite M-11-04Madan Huzare M-11-18

Neha Mitra M-11-32

Case study details

• Vinaya Kumar Mylavarapu• Ramalingam Meenakshisundaram• www.applestore.com

Dawn of APPLE• Apple was founded on 1st April, 1976

• Steve jobs: Video game designer• Steve Wozniak: Electronics engineer (HP)

Steve Jobs Steve Wozniak

Apple models

Apple I

• MOStek 6502 processor• US $666.66

Apple II

• MOStek 6502 + colour graphics + audio cassette drive

• US $ 1298

Lisa & Macintosh

• Lisa: 1983– Large business– GUI, hand held mouse– US $ 9995

• Macintosh (Mac): 1984–Mac OS, GUI– US $ 2495– Campaign “1984”

• Exit of Jobs (1985)

• Re entry of Jobs (1996-2000)

Introduction of iPod• October 2001• Forayed into digital music market• Model I: US $339• Model II: US $ 499• April 2003: iTunes music store• Jan, 2005: iPod shuffle

Apple online store

• Traditional channels: Authorized resellers, retailers• Poor sales support• 24 hr online apple store ( www.apple.com/store) (1997)• New iMacs & power book laptops online stores before

with the resellers• Lime iBook

Apple Goes Retail

• Speculations on Apple opening its physical stores;• Apple hired Ron Johnson, Former VP of Merchandising at

Target Stores;• Early 2001 several Apple resellers saw a fall in the 1st Quarter

revenues;• In May 2001, Apple confirmed it would open its company

owned retail store.

Apple Goes Retail

• May 19, 2001, Apple opened its 1st retail store at Tysons Corner Center, a large mall in Mclean Virginia;

• The store did business of around US$ 599000 within the 1st two days;

• Same week, Apple opened its 2nd store at Glendale Galleria in Glendale, California;

• Scott Grenz, general manager of Capitol Mac, an Apple reseller said, “it’s going to hurt us, but it’s a necessary evil.”

• Jobs completely supported the idea of the company owned new stores and said that the resellers need not worry about them;

Trouble begins• Allegation by Tom Santos President of MACadam

computer,Inc(MACadam) in san Francisco, one of the authorized Apple resellers.

His allegations include:• Difficulty in procuring iBook with CD rewritable/DVD

combination drives from the company.• Only a few copies of Mac OS X 10.1 update CDs.• Unfairly fixed upper limit on the value of the faulty

goods to be returned to the company by resellers.• Got involved in predatory practices (obtained 5300

invoices which on comparison with their invoices found difference)

• Apple snatched the reseller customers and got them to their main store.

Contd….• Santos filed a million dollar law suit accusing

company of fraud, breach of contract, unfair competition, false advertising and even charges under Federal Racketeer influenced & Corrupt Organization Act (RICO Act) in January 2003.

• Many resellers such as MacTech Systems of Bend, Oregon and Los Angeles based Computer International joined Santos and filed a law suit in February 2003.

• In march 2003 Thomas Armes ,Elite Computers of California filed a lawsuit against Apple and claimed US$5 million in compensation.

• All the law suits were filed in the Superior Court of Santa Carla.

Apple revises the Terms & Conditions

• By the end of March 2003 more than 50 apple stores were opened irrespective of the increasing number if resellers filing law suits.

• During the march 2003, as the contracts expired apple issued new contracts and fixed the due date to sign them on 25th march 2003.

Thinksecret.com

• A new dispute settlement process was included – if within initial 60 days of written notice of dispute, it wasn’t resolved between the reseller and the senior management, both were entitled for a non binding mediation process for another 60 days. If still no outcome then ligitimation may commence. And this was applicable even for the earlier disputes. It also didn’t give the right to the reseller to jury trial.

• Resellers would have to provide their business & inventory reports along with list of customers to Apple. Even if the contract expired Apple could check the stores of the resellers.

• In case of any liability then Apple as well as reseller was liable to not more that US $100000.

Result of the new Terms & Conditions

•50 resellers & companies such as d Dell& Target made changes in the contract and submitted the same to Apple.•Rejection & Cancellation of dealerships.•After some negotiations resellers like Santos & Target agreed to contract.• Resellers like Buy.com,MicroCentre & Elite computers were removed from the list.

Glitches in ContractAccording to Thinksecrest.com in March 2004,• Issued contract agreements to be submitted by April 2, 2004;• Gave right to discriminate between its retail and reseller stores;• As per new contract Apple could allocate the available

inventory to its physical and online stores other dealers before considering the resellers;

• Restricted resellers from using Apples trademark on promotional equipments;

• Forbade resellers from upgrading their stores;• Revised Apple’s maximum liability to USD 3 lakh;

Conflict gathers momentum..

• March 2004, resellers started www.TellOnApple.org• Contents:

– Articles published in newspapers and magazines

– Information on unethical practices through customers and employees

– List of complaints posted by resellers

• 2 million hits by the end of 2004• Protests in California during shareholders’ meeting• Inform shareholders of Predatory Policies of Apple• Tim Cook’s reply to Armes: “Indirect sales channel

represented 58% of revenue”

Conflict gathers momentum..

• June 2004, Santos files a 4th complaint on charges of breach of contract, fraud, negligent misrepresentation, false advertising, trade libel, defamation,etc.

• Claims USD 70,000 – unpaid monies

USD 7.5 million in damages• Santa Clara Superior Court rules to proceed with charges of

fraud and negligent misrepresentation• By December 2004, five lawsuits were filed by different

resellers• Santos announced closure of MACadam

Consumers & Dealers file a Class-Action Lawsuit

• September 2004, Retail store sales: USD 1.185 billion and Profit: USD 39 million

• February 2005, Armes files his 3rd complaint• Five member group of consumers and dealers file a class-

action lawsuit• Accusations:

– Selling refurbished used products– Deliberate reduction in warranty coverage– Resellers allegations similar to that of Santos

• Damages claimed: USD 75,000• Apple introduces new scheme: Price Matching Program

Conclusion

• As a part of overall growth strategy, Apple continued to open

more retail stores

• 103 stores by end of April 2005, 3 in London, Tokyo, Osaka

• Plans to open 25 more stores across the globe

• Resellers in Taiwan, Australia and Canada also make similar

allegations

Questions?

Apple forayed into Retail despite risks

Industry analysts’ and commentators’ view:

• Unnecessary problems

• Cost of leasing in major cities

• Rift between company and resellers

• Lower profit margins on PC sales

Apple forayed into Retail despite risks

Apple’s view:

• Highly competitive PC market

• Increase visibility of products – pro display

• Create brand awareness

• Explain benefits and features – purchasing experience

• Increase market share – 5%

What do you think Apple could have done to avoid the channel conflicts?

Only allowed big resellers to sell by online store.

New products Like Lime iBook laptops were available only at Apple online store.

In 1999 online store started selling products like iMac & powerbook laptop before they were stocked with Resellers.

Online buying involved Built to order which was not allowed to resellers.

Resellers were not informed about opening of Apple own Retail stores.

Only few copies of Mac OS X 10.1 CDs to resellers while stocking its own store with no. of free copies.

Suggest measures that can be taken by Apple to resolve the conflict & increase its market share?

Apple management should discuss with resellers about their complaints by taking periodic meetings.

Apple should start special department to take care resellers complaints.

Followed faulty accounting & quality control system.Santos stated, Apple misbilled in more than 1000 cases.

As stated by Jobs, some resellers are not displaying products properly & salesman are not giving information about product properly. Apples salesman decreases authenticity of authorized resellers, they also told customer to buy from Apple stores.

Do you think Apples channel strategy was to work with the resellers or to completely eliminate them?

Complete elimination of Resellers.

By opening more Apple retail stores, Apple was trying to sell everyone themselves.

Sales of Apple store increasing while resellers closing their business.

Avoid potential cannibalization.

Contracts with resellers with terms & conditions in favor of Apple.

Mandatory to renew every year. Provide customer data & business reports on demand. Apple can check store even after expiry of contracts. Those who demanded change in contracts, Apple rejected their proposals & told them not to order new products. MACadam, MicroCenter, Elite & Buy.com were removed from resellers list.

Apple issued new contracts in 2004 which gave Apple right to discriminate between them & resellers.

THANK YOU!