Buyout a double-edged sword for Apple

Direct sales cut costs but risk alienating resellers. Apple executives are also considering build-to-order.

Michael Kanellos
Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
3 min read
The acquisition of
Power Computing has opened the door for Apple to become a mail order giant that competes with Dell and Gateway 2000.

It could also prove its undoing.

How and when Apple resolves the issue of whether to sell computers directly to Mac merger consumers is emerging as one of the key issues in Apple's acquisition of most of Power's assets.

Selling computers directly to customers through the mail or over the Internet allows computer makers to cut three percent and more from their prices and hence achieve wider market share. Power has become a $400 million computer concern through direct sales. Its executive ranks are chock full of ex-Dell employees who helped create Power; as part of the deal, Apple has acquired the right to negotiate openly with these employees.

Selling directly, however, also alienates a company's reseller base because it eats into their revenues. Apple resellers have already served notice that a shift to a direct sales model would not fly well.

"If they decide to go direct, they'd better have a really good business plan because the backlash would be severe. It could wipe out their channel business within 30 days," said Eric Walton, vice president of product management at Entex Information Services, a $2-billion-plus corporate reseller. "It's a huge risk."

While Apple executives have stated that their plans are currently under

Acting CEO Fred Anderson ponders direct sales
evaluation, it is likely that in January a new business model will emerge which will incorporate some form of Power's direct sales model. Acting Apple CEO Fred Anderson said in a conference call that Apple is interested in hiring up to 25 of the Power employees who built the direct marketing unit. Apple, he admitted, paid for the right to negotiate with these employees.

"We are evaluating as to how we might develop an indirect, direct distribution capability," he said. "We are interested in acquiring people who have expertise in the direct marketing area."

Guerrino DeLuca, executive vice president at Apple, echoed Anderson's comments, stating, "We are evaluating how far and when and in which fashion we enter into direct markets." When Power ceases production of Macintosh-based computers by the end of the year, DeLuca added that it would not be out of the realm of possibility for Apple to introduce a new business model.

Anderson said that the eventual form of the direct/indirect model might resemble the "build-to-order" strategies promoted earlier in the year by Compaq. Build-to-order, according to most observers, reduces the potential for conflict but allows vendors to cut costs to a certain degree.

Sources close to Apple, however, said that the company is considering a wider range of plans than Compaq implemented, including converting all sales to direct sales. Another option under consideration is devising a program under which Apple sells directly to consumers while resellers pursue the business market.

Mike France, president of Ft. Lauderdale, Florida's Unique Solutions, a large Macintosh dealer, was not alone in saying that a hybrid business model is not inconceivable. On the other hand, no computer vendor has ever been able to make it work well, he said.

The shift could also hurt Apple's credibility. "The policy that took them from 20 percent of the market to 3 percent was exclusivity," said Bob Waller, chief executive officer of Education Access. "What are school districts going to think of this acquisition?"

Education Access, he pointed out, was Apple's largest education dealer until this past June, when it signed a exclusive, one-year deal to act as Power's representative in the school market. "We're looking into this from a legal standpoint."

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