Apple takes 'direct' hit
Two days after debuting its new direct sales strategy through Apple Store, Apple Computer Inc. has hit the first of what could be many bumps along the long road back to respectability.
Apple Store on the Web was off to an auspicious start, according to company officials, after receiving more than 4 million "hits" and logging $500,000 in orders during its first 12 hours of operation.
But ClubMac, one of about 1,000 Apple resellers, quickly undercut Apple's minimum advertised prices on the new Power Mac G3 systems by $200 and is selling a Power Mac 7300/180 for $500 less than Apple's listed price.
On the surface, there's nothing dubious about this sequence of events. Apple doesn't mind if its resellers undercut the prices because the end result is the same: more consumers using Macs.
But the strategy is something of a double-edged sword in that those stores that only carry Macs, such as ComputerWare, may have to become more like value-added resellers, much like dedicated IBM and Compaq dealers did after moving away from their original retail strategies.
"Of course it puts them in competition with their retailers, but keep in mind, they also spent time working with distributors and big firms like CompUSA to set this up properly," said Tim Bajarin, an analyst at Creative Strategies. "Apple is still in a crisis mode and they need to be competitive. They need to let their customers buy from multiple channels, and this is another one that is important to the entire buying public."
And that may be the bottom line. Apple needs to sell lots of machines, feelings be damned.
Financial analysts said the fact that Apple is trying new ways to market its products is a step in the right direction, but doubt that it will have the kind of impact other direct-sales programs have had in the PC market.
"This is not even close to what Dell has done and really isn't supposed to be," said Rick Berry, an analyst at Murphey Marseilles Smith. "Dell's plan was to eliminate the middleman and pass on the savings to the end user. Apple needs the middleman. They need every man."
Of course, Dell, which does about $3 million a day in PC sales through its direct ordering program, doesn't have dedicated resellers. Apple's new strategy puts its resellers in a bit of a bind.
Resellers jack up the cost of PCs 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 Apple's resellers would undercut the computer maker itself.
"Apple is basically telling resellers they can cut their prices and eat into their own margins if they want to, because they don't care who sells it," said James Staten, an industry analyst at Dataquest Inc. "This program is simply another alternative targeted mainly for people who are knowledgeable about Apple and want custom configurations."
Cyberian Outpost, an Internet-only reseller that was recently granted status as an authorized Apple reseller, is also undercutting official prices.
Cyberian officials said the minimum advertised prices established by Apple are merely suggestions, leaving resellers the option of slashing prices to essentially compete with Apple.
The system may be flawed and actually work against some of the firms that have been Apple's greatest proponents. But desperate times call for drastic measures.
"In the end, Apple has to get the Macs into the hands of their potential buyers any way they can," Bajarin said. "Direct selling is a market reality that all PC vendors are having to deal with, whether they or their dealers like it or not."