Apple Grows, But So Does Channel Conflict

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Apple Grows, But So Does Channel Conflict Powered By Docstoc
					Apple Channel Conflict
Companies such as Apple face tough decisions as to whether to sell their
products directly to consumers through their own retail stores (e.g. Apple
Stores) or through retailers (e.g. Best Buy or AT&T stores). Each approach
has inherent advantages/issues and when companies try to do both, it
leads to inevitable conflict – known as Channel Conflict. Read the following materials and
answer the questions at the end. There may not be truly right or wrong answers to these
questions. The only wrong answer is one that is not fully thought out.

Channel Conflicts - Apple Inc.
Though an older 2007 article outlined below, “Apple Grows, But So Does Channel Conflict”,
demonstrates an excellent example of marketing and channel conflicts. As a result of the wide
success of Apple’s comeback through the sales of iPods and iPhones, Apple aggressively
increased the growth of their retail stores at a rate of about 33 percent a year (push strategy). At
the same time, Apple previously had utilized a distribution channel similar to many other
companies (non-Apple stores). Prior to Apple’s return to dominance, there were very few Apple
retail stores available at all. However, by opening more Apple retail stores, Apple basically is
trying to sell everyone themselves. Hence, eliminating the need and potentially cannibalizing
sales away from the companies they distribute their products to.

Later, Apple decided to limit the sale of iPhones through AT&T contracts only. However, since
AT&T sells it phone through its own AT&T stores and other retailers such as Best Buy, the
iPhone was widely available albeit still limited to the AT&T network. This AT&T exclusive likely
created its own conflicts. After the exclusive ended, Apple later decided to sell their iPhones on
other cell providers (including Verizon), thus increasing distribution significantly but also
creating new potential channel conflicts.

Due to the huge popularity of their products, Apple holds a definite channel advantage to their
dealers. Lately, for product such as the iPad, Apple utilizes more of a pull strategy while their
Apple retail stores simply attract customers on its own through brand equity and innovative
products. In their distribution channels, Apple utilizes a heavy price policy that prevents many
distributers from having Apple products ‘on sale’. Instead, most organizations typically provide
a ‘gift card’ to their own stores with the sale of an Apple product if they wish to have it ‘on sale’.

Apple Grows, But So Does Channel Conflict
July 2007 by Edward F. Moltzen, CRN

Apple's quarterly financials, which the company reported this week, show Apple is growing at
blazing speed. But beneath the surface, channel conflict is growing, too.

The Cupertino, Calif.-based computer and cell-phone maker said it now has 185 retail stores
open throughout the U.S., which account for $915 million in sales and $184 million in "segment
margin." Overall, Apple executives said, Apple retail stores are growing at a 33 percent, year-
over-year clip, and serve almost 22 million customers a quarter.

"The stores offer customers a great experience for buying Macs, iPods and now iPhones," Peter
Oppenheimer, Apple's chief financial officer, told analysts during a conference call to discuss the
company's earnings.

And, for some of Apple's channel partners, therein lies the problem.
"It's adversarial," said George Blakely, owner and manager of MacHeads, a Lancaster, Pa.-based
solution provider and Apple channel partner. "Apple would like to sell everything themselves.
They keep opening more and more retail locations. They want to drive business to their own
stores. They offer deals there that they don't extend to (the channel.)

"Every time they open another store, they are potentially putting a solution provider out of
business," Blakely said.

Some Apple solution providers have accepted the company's strategy, maintaining a loyal
customer base of their own in spite of competition from Apple's retail locations. But several
interviewed in recent weeks have voiced annoyance with the company's decision to sell iPhones
only through Apple retail stores, online, or via AT&T stores.

Beyond the retail element of Apple's business, the computer maker is seeing substantial growth
in another area of conflict with the channel: the education space. Several years ago, Apple opted
to take much of its education sales direct to education customers and bypass the channel. When
its sales in that segment were relatively low, conflict was not a huge issue. But now Apple
education sales are growing at a significant clip--Oppenheimer said Apple saw record sales of
Macs into education accounts during its most recent quarter.

"Obviously, it's harder than it used to be," said Bob Young Jr., president of ComputerTree, a
Winston-Salem, N.C.-based solution provider and Apple channel partner. However, he said his
company maintains a position as an Apple service provider to education accounts and, while his
company does not have the opportunity for hardware sales into the accounts it is able to keep its
foot in the door.

"We have relationships with the schools," Young said. "We do services for them, training, on-site
technical support. It was nicer when we got that hardware sale through Apple, but (going direct)
is their decision." Young said his company is "lucky in that the closest Apple store is about an
hour and a half away."

An Apple spokeswoman could not immediately provide a response by the company to channel
concerns about growing conflict. For now, though, solution providers say they are seeing growth
and are benefitting indirectly from the success of iPhone sales and the Mac platform--the so-
called "halo effect."

"We have seen a renewed strength in the product," Young said. "We're definitely seeing
Windows users come in and talk to us about Macintosh, and they are switching over from
Windows to Mac." To take advantage of the growth potential, Young said, his company has
opened kiosks in some local malls to expand its sales.

"We've had several customers come in to upgrade their computers because they had the iPhone,
and needed a little more juice on their computer to work with it," Young said. "Again, it is
disappointing for us not to be involved in (iPhone sales.)"

Tommy Turner, president of AIS Computers, a Fayetteville, Georgia-based solution provider
and Apple channel partner, said sales of Mac notebooks were especially strong during the last
quarter, that the delay of Apple's Leopard operating system from the spring until October likely
didn't have a great impact on sales, and that the PC maker does provide regular direct contact
with the solution provider. He said he believes "Apple has been pretty good" and accessible, its
notebook products are "elegantly designed" and that he believes interest is building toward
Leopard in the fall.
Name: ________________________________________________

1. What is meant by the idea that Apple Stores eliminate “the need and potentially
   cannibalizing sales away from the companies they distribute their products to”?
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2. Why is Apple encouraging channel conflict by expanding the number of Apple stores? What
   alternatives do their channel members have?
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3. What is meant by “Apple utilizes a heavy price policy” and why do they do that? Why are
   they able to get their distributors to accept it?
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______________________________________________________________________________

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4. What do you think is meant by a “solution provider” such as MacHeads and ComputerTree?
   What value do you think a solution provider adds that Apple or retail stores don’t provide
   itself?
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______________________________________________________________________________

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5. What do you think is meant by the “halo effect” from the success of iPhone and the Mac
   platform? Why is that a competitive advantage for the solution providers over non-Apple
   solution providers?
______________________________________________________________________________

______________________________________________________________________________

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6. This article was written in 2007. Using the Internet, cite evidence that the Apple strategy to
   expand their retail stores is working. Find at least one more recent example about problems
   with Apple’s Distribution strategy.
______________________________________________________________________________

______________________________________________________________________________

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7. If you had to buy an Apple product today, where (what store) would you buy it? Why?
______________________________________________________________________________

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