Apple braces for price war
Apple may be on the brink of a price war among its resellers following widespread changes to its sales channels, including this week's launch of an online store.
The first shot was fired last week when ClubMac, a large catalog reseller, started shipping Macs at prices about 5 percent lower than Apple recommends.
ClubMac was quickly joined by Cyberian Outpost Inc. of Kent, Conn., one of the biggest online retailers, which is currently offering the new desktop Power Mac G3 for $1,889 - $110 less than Apple's price. ClubMac is shipping the system for $1,890.
Others are widely expected to join the fray. "I think we're on the verge of a huge price war," said Mike McNeill, president of Irvine, Calif.-based Pacific Business Systems Inc., ClubMac's parent company.
Apple for years has battled a "gray market" of discount dealers, but it has avoided price wars among authorized resellers thanks to widespread adherence to its system of selling at or above a minimum advertised price, or MAP.
Designed to level the playing field, resellers that honor MAP are rewarded with "co-op funds" - cash to help cover the cost of advertising and marketing.
Contrary to news reports that the price cuts were prompted by competition from Apple's online store, ClubMac's McNeill said his company broke ranks following the news one month ago that Apple on Jan. 1 will cut co-op funds by 75 percent.
"The co-op funds were a powerful incentive to maintain authorized prices," McNeill said.
Ira Feigelman, Cyberian's vice president of product marketing, agreed. "After the change to the co-op program, it didn't make sense to follow MAP anymore," he said.
In addition to cutting co-op funds, Apple in the past few weeks has also shaken up the way dealers get products, announced a chain of ministores within retail giant CompUSA Inc., and launched a direct sales program through a Web-based store and toll-free hot line.
Launched Monday, the online store clocked 4.4 million visitors and more than $500,000 worth of business in the first 12 hours, Apple said. Along with selling a wide range of Apple products, it lets customers custom-configure the new G3 systems.
"There are several resellers that have been emphatic with me that [direct sales] is the last straw because it appears that Apple is not interested in the sales channel and will move to eliminate it," said Jim Hancock, director of sales at Computer Town Inc. of Salem, N.H., and chairman of the board of directors for the Apple Resellers Association, which represents Apple's 3,000 resellers.
However, Hancock stressed that Apple's initiatives were a form of "tough love." He said that "some resellers are going to get hurt, especially those that haven't differentiated themselves. But for this business to survive, Apple has to be profitable."
Jeff Hansen, Apple's senior director of channel sales and distribution, said he hoped there wasn't a price war looming. "It benefits no one in the long run; it becomes impossible to sustain business," he said.
Hansen said Apple had considered ditching MAP but retained it at the request of resellers. Dealers that violate MAP will have co-op funds withheld for two months, he said.
Hansen said price cutting puts a strain on the relationship between Apple and the reseller but is not grounds to remove them as authorized resellers.
Other resellers are on the fence, including Renton, Wash.-based Multiple Zones International Inc., owner of cataloger MacZone, and ComputerWare Inc., a large regional reseller based in Sunnyvale, Calif.