Tech Industry

Reseller undercuts Apple

Apple basks in the afterglow of its new sales strategy and product announcements, but the master plan already faces a test from a hard-charging reseller, ClubMac.

Apple Computer (AAPL) is still basking in the afterglow of its new sales strategy and product announcements, but the master plan already faces a test from a hard-charging reseller, ClubMac.

Apple unveiled its Apple Store direct sales initiative yesterday, which consists of an online site and a toll-free hotline. The company said today that the store received over 4.4 million "hits" and logged over $500,000 in orders during its first 12 hours of operation.

Products sold by the Apple Store are listed at what is called the "minimum advertised price," or MAP. Theoretically, customers shouldn't be able to find a better deal on a new system. But some resellers are now undercutting official prices by as much as $500.

Distributors and resellers generally mark up the cost of equipment to make their profits, and Apple is unlikely to undercut its product dealers on price. While direct PC vendors such as Dell Computer have gained market share by cutting out the middleman and selling directly to customers, it was not expected that resellers would undercut the computer maker itself.

ClubMac is selling new Power Mac G3 systems for up to $200 less than the MAP price, and is selling a Power Mac 7300/180 for over $500 less than the MAP price.

The company says some people have been confused because they believed that ClubMac was no longer an authorized Macintosh dealer--though overall reaction has been positive and sales numbers are up, according to Mike McNeil, president of Pacific Business Systems, the parent company of ClubMac.

McNeil says that ClubMac can offer systems for less because it has decided to forgo money that Apple gives to its resellers for advertising at specific price levels.

When ClubMac started selling systems at the same low prices as those appearing on the gray market, some customers thought that they too were selling gray market systems and that Apple had taken away ClubMac's status as an authorized reseller. Not true, said McNeil.

"We're being more aggressive in trying to differentiate ourselves from competitors," he noted. The company, which also has a catalog, maintains its status as an Apple authorized reseller

But ClubMac isn't the only site selling systems for less. Cyberian Outpost, the Internet-only reseller which was recently granted status as an authorized reseller, is also undercutting official prices.

Resellers like Cyberian say pricing "rules" laid down by Apple can be broken. "The [minimum advertised price] is a suggestion. Apple has changed the penalties for not adhering to the MAP. We decided that it was clear to us nobody would be obeying the MAP anywhere, so we decided not to," says Darryl Peck, president of Cyberian.

The impending price wars exemplify the delicate position Apple has put itself in by adopting the direct sales initiative. The company is eager to increase sales through its direct efforts while avoiding upsetting resellers, particularly if it competitively prices its products.

But Apple countered that it was already at a price disadvantage over catalog and Internet resellers because customers buying systems from the company pay sales taxes, which can amount up to over 8.5 percent of the purchase price in California, said Jeff Hansen, senior director of channel sales and distribution for Apple.

"Our intent was to offer an additional solution or vehicle for sales, at the same time maintaining a channel neutral position. There is definite interest in the Apple Store--we would like to think it is just augmenting what we are doing today," he added.

"The channel provides support and configuration availabilities [sic] that aren't available at the store," noted Hansen, offering an example of someone who wants to buy a non-Apple scanner or peripheral on the same purchase order.

One advantage Apple does have over ClubMac and Cyberian is that the new G3 systems are being offered on a build-to-order basis at the company's Web site, meaning that a customer can configure a system in any number of ways with different hard drives, memory, graphics cards, and other components. All other Mac systems sold on the Web will be in standardized configurations.

But eventually the company plans to let resellers also order custom systems from Apple and resell those to customers. When that happens, it is unclear as to what reasons people would have to continue buying direct from Apple.

Only time will tell if Apple can juggle the demands of customers and resellers. However, with the new G3 systems it is finally in the pleasant position of having significant demand for its products.