Channel Conflict at Apple

Presented by

Sucheta Amin M-11-02

Radhika Bhoite M-11-04
Madan 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 Steve Wozniak

• Steve jobs: Video game designer

• Steve Wozniak: Electronics engineer (HP)
 Apple models
Apple I Apple II
• MOStek 6502 processor • MOStek 6502 + colour
• US $666.66 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 Contract
According 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!